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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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Bibliographic Info

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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  1. Joe Peek & Eric S. Rosengren, 2003. "Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan," NBER Working Papers 9643, National Bureau of Economic Research, Inc.
  2. R. Glenn Hubbard, 1995. "Is there a "credit channel" for monetary policy?," Review, Federal Reserve Bank of St. Louis, issue May, pages 63-77.
  3. Alan Ahearne & Naoki Shinada, 2005. "Zombie firms and economic stagnation in Japan," International Economics and Economic Policy, Springer, vol. 2(4), pages 363-381, December.
  4. Nakakuki, Masayuki & Otani, Akira & Shiratsuka, Shigenori, 2004. "Distortions in Factor Markets and Structural Adjustments in the Economy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 22(2), pages 71-99, May.
  5. Stephen G. Cecchetti & Marion Kohler & Christian Upper, 2009. "Financial Crises and Economic Activity," NBER Working Papers 15379, National Bureau of Economic Research, Inc.
  6. Lawrence J. Christiano & Mathias Trabandt & Karl Walentin, 2010. "DSGE Models for Monetary Policy Analysis," NBER Working Papers 16074, National Bureau of Economic Research, Inc.
  7. Yasushi Hamao & Jianping Mei & Yexiao Xu, 2007. "Unique Symptoms of Japanese Stagnation: An Equity Market Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 901-923, 06.
  8. James Bullard, 2010. "Seven faces of "the peril"," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 339-352.
  9. Thomas Laubach & John C. Williams, 2001. "Measuring the natural rate of interest," Finance and Economics Discussion Series 2001-56, Board of Governors of the Federal Reserve System (U.S.).
  10. Michał Brzoza-Brzezina, 2006. "The information content of the neutral rate of interest," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 14(2), pages 391-412, 04.
  11. Sekine, Toshitaka & Kobayashi, Keiichiro & Saita, Yumi, 2003. "Forbearance Lending: The Case of Japanese Firms," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(2), pages 69-92, August.
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