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Interest rates close to zero, post-crisis restructuring and natural interest rate

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  • Cizkowicz, Piotr
  • Rzonca, Andrzej

Abstract

Central banks seem not to account for the influence of interest rates close to zero on the natural interest rate after the bursting of the asset bubble which triggered financial crisis. We claim that this omission may have deleterious consequences. Should interest rates close to zero persistently decrease natural interest rates, that would mean fall in TFP growth and more limited central bank’s capacity to influence aggregate demand and price dynamics. We explain that interest rates close to zero may persistently reduce the natural interest rate because in economy requiring post-crisis restructuring they impede that process and facilitate forbearance lending, which crowds viable economic agents out of credit through a number of channels. To reduce these risks central bank could voluntarily set the lower bound for interest rates cuts at, say, 2%. The bound appropriate for a given economy should be a function of its growth and interest rates in the pre-crisis period. We argue that irrespective of central bank’s credibility such a change in the monetary policy conducting in economies requiring post-crisis restructuring would bring better outcomes than keeping there interest rates close to zero.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36989.

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Date of creation: Dec 2011
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Handle: RePEc:pra:mprapa:36989

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Keywords: interest rates close to zero; monetary policy; new Keynesian analytical framework; restructuring; credit;

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