Misconceptions Regarding the Zero Lower Bound on Interest Rates
The paper reviews issues related to the zero lower bound (ZLB) on interest rates and argues that all of the following propositions are invalid: (1) in a ZLB situation, gshaping interest rate expectations is essentially the only tool that central bankers have h (Bernanke, Reinhart, and Sack ); (2) fiscal policy actions such as ghelicopter drops h are in theory more effective than monetary policy actions; (3) the prominent gfoolproof way h policy rule of Svensson (2001, 2003) is applicable more generally?that is, even when exact uncovered interest parity holds?than the alternative exchange rate rule of McCallum (2000); (4) both of the exchange rate strategies described in (3) are open to the objection that they constitute gbeggar-thy-neighbor h approaches; and (5) there is a significant danger of ZLB difficulties stemming from a g deflationary trap h type of equilibrium, as distinct from a gliquidity trap. h
Volume (Year): 24 (2006)
Issue (Month): S1 (December)
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