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The zero-lower bound on interest rates: Myth or reality?

  • Jarrow, Robert A.

Unconventional monetary policy tools are based on the belief that there exists a zero-lower bound on interest rates. This paper argues, based on economic theory and the empirical evidence, that this belief is a myth and not a reality. It is shown that a negative default-free spot rate of interest is consistent with an arbitrage-free term structure evolution in a competitive and nearly frictionless market. It is not frictionless to the extent that consumers, firms, non-bank financial institutions, and banks have some realistic constraints imposed on their trading activities.

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Article provided by Elsevier in its journal Finance Research Letters.

Volume (Year): 10 (2013)
Issue (Month): 4 ()
Pages: 151-156

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Handle: RePEc:eee:finlet:v:10:y:2013:i:4:p:151-156
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  1. Lenza, Michele & Pill, Huw & Reichlin, Lucrezia, 2010. "Monetary policy in exceptional times," Working Paper Series 1253, European Central Bank.
  2. Robert Jarrow, 2010. "Convenience yields," Review of Derivatives Research, Springer, vol. 13(1), pages 25-43, April.
  3. Black, Fischer, 1995. " Interest Rates as Options," Journal of Finance, American Finance Association, vol. 50(5), pages 1371-76, December.
  4. Ben S. Bernanke & Vincent Reinhart & Brian P. Sack, 2004. "Monetary policy alternatives at the zero bound: an empirical assessment," Finance and Economics Discussion Series 2004-48, Board of Governors of the Federal Reserve System (U.S.).
  5. Bernanke, Ben S., 2012. "Monetary Policy since the Onset of the Crisis : a speech at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming, August 31, 2012," Speech 645, Board of Governors of the Federal Reserve System (U.S.).
  6. Joyce, Michael & Lasaosa, Ana & Stevens , Ibrahim & Tong, Matthew, 2010. "The financial market impact of quantitative easing," Bank of England working papers 393, Bank of England.
  7. Robert A. Jarrow, 2009. "The Term Structure of Interest Rates," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 69-96, November.
  8. James D. Hamilton & Jing Cynthia Wu, 2011. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," NBER Working Papers 16956, National Bureau of Economic Research, Inc.
  9. Canlin Li & Min Wei, 2012. "Term structure modelling with supply factors and the Federal Reserve's Large Scale Asset Purchase programs," Finance and Economics Discussion Series 2012-37, Board of Governors of the Federal Reserve System (U.S.).
  10. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
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