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Monetary policy and the zero bound to interest rates: a review

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  • Yates, Tony

Abstract

This paper reviews the literature on what the zero bound to nominal interest rates implies for the conduct of monetary policy. The aim is to evaluate the risks of hitting the zero bound; and to evaluate policies that are said to be able to reduce that risk, or policies that are proposed as means of helping the economy escape if it is in a zero bound 'trap'. I conclude that policies aimed at 'cure' are arguably more uncertain tools than those aimed at 'prevention', so prevention is a less risky strategy for policymakers. But since the risks of hitting the zero bound seem quite small anyway, and the risks of encountering a deflationary spiral smaller still, it is conceivable that inflation objectives that typify modern monetary regimes already have more than enough insurance built into them to deal with the zero bound problem. JEL Classification: E52, E3, F41

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0190.

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Date of creation: Oct 2002
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Handle: RePEc:ecb:ecbwps:20020190

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Keywords: liquidity trap;

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Cited by:
  1. Reifschneider, David L. & Roberts, John M., 2006. "Expectations formation and the effectiveness of strategies for limiting the consequences of the zero bound," Journal of the Japanese and International Economies, Elsevier, vol. 20(3), pages 314-337, September.
  2. van Suntum, Ulrich, 2009. "Economic confidence, negative interest rates, and liquidity: Towards Keynesianism 2.0," CAWM Discussion Papers 24, Center of Applied Economic Research Münster (CAWM), University of Münster.
  3. Merola, Rossana, 2010. "Financial frictions and the zero lower bound on interest rates: a DSGE analysis," MPRA Paper 29365, University Library of Munich, Germany.
  4. Ulrich van Suntum & Metin Kaptan & Cordelius Ilgmann, 2011. "Reducing the Lower Bound on Market Interest Rates," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 41(2), pages 133-146, September.
  5. Ilgmann, Cordelius, 2011. "Silvio Gesell: 'a strange, unduly neglected' monetary theorist," CAWM Discussion Papers 23, Center of Applied Economic Research Münster (CAWM), University of Münster.
  6. Girardin, Eric & Moussa, Zakaria, 2011. "Quantitative easing works: Lessons from the unique experience in Japan 2001–2006," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(4), pages 461-495, October.
  7. Alfonso Palacio-Vera, 2006. "On Lower-bound Traps: A Framework for the Analysis of Monetary Policy in the ÒAgeÓ of Central Banks," Economics Working Paper Archive wp_478, Levy Economics Institute.
  8. Alfonso Palacio-Vera, 2008. "Money wage rigidity, monopoly power and hysteresis," Documentos de trabajo de la Facultad de Ciencias Económicas y Empresariales 08-02, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
  9. Ilgmann, Cordelius & Menner, Martin, 2011. "Negative nominal interest rates: History and current proposals," CAWM Discussion Papers 43, Center of Applied Economic Research Münster (CAWM), University of Münster.
  10. Dieppe, Alistair & McAdam, Peter, 2006. "Monetary policy under a liquidity trap: Simulation evidence for the euro area," Journal of the Japanese and International Economies, Elsevier, vol. 20(3), pages 338-363, September.
  11. David L. Reifschneider & John M. Roberts, 2005. "Expectations formation and the effectiveness of strategies for limiting the consequences of the zero bound on interest rates," Finance and Economics Discussion Series 2005-70, Board of Governors of the Federal Reserve System (U.S.).
  12. Athanasios Orphanides, 2010. "Monetary Policy Lessons from the Crisis," Working Papers 2010-1, Central Bank of Cyprus.
  13. Taimur Baig, 2003. "Understanding the Costs of Deflation in the Japanese Context," IMF Working Papers 03/215, International Monetary Fund.
  14. Ulrich van Suntum, . "Economic Confidence, Negative Interest Rates, and Liquidity: Towards Keynesianism 2.0," Working Papers 200108, Institute of Spatial and Housing Economics, Munster Universitary.
  15. Hatcher, Michael C. & Minford, Patrick, 2013. "Stabilization policy, rational expectations and price-level versus inflation targeting: a survey," Cardiff Economics Working Papers E2013/14, Cardiff University, Cardiff Business School, Economics Section.
  16. Otmar Issing, 2004. "Geldpolitik für den Euroraum," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 5(4), pages 381-404, November.

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