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Misconceptions Regarding the Zero Lower Bound on Interest Rates

Author

Listed:
  • Bennett T. McCallum

    (Carnegie Mellon University (E-mail: bmccallum@cmu.edu))

Abstract

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 [2004]); (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

Suggested Citation

  • Bennett T. McCallum, 2006. "Misconceptions Regarding the Zero Lower Bound on Interest Rates," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 24(S1), pages 13-26, December.
  • Handle: RePEc:ime:imemes:v:24:y:december:i:s1:p:13-26
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    References listed on IDEAS

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    1. Luoma, M & Laitinen, EK, 1991. "Survival analysis as a tool for company failure prediction," Omega, Elsevier, vol. 19(6), pages 673-678.
    2. Amemiya, Takeshi, 2001. "Endogenous Sampling in Duration Models," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(3), pages 77-96, November.
    3. Palepu, Krishna G., 1986. "Predicting takeover targets : A methodological and empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 8(1), pages 3-35, March.
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    More about this item

    Keywords

    Interest rates; Zero lower bound; Quantitative easing; Expectations; Deflation trap; Liquidity trap;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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