IDEAS home Printed from https://ideas.repec.org/a/ime/imemes/v24ydecemberis1p13-26.html
   My bibliography  Save this article

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, "shaping interest rate expectations is essentially the only tool that central bankers have" (Bernanke, Reinhart, and Sack [2004]); (2) fiscal policy actions such as "helicopter drops" are in theory more effective than monetary policy actions; (3) the prominent "foolproof way" 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 "beggar-thy-neighbor" approaches; and (5) there is a significant danger of ZLB difficulties stemming from a " deflationary trap" type of equilibrium, as distinct from a "liquidity trap."

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
    as

    Download full text from publisher

    File URL: https://www.imes.boj.or.jp/research/papers/english/me24-s1-3.pdf
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bagus, Philipp & Howden, David, 2016. "Central Bank Balance Sheet Analysis," MPRA Paper 79801, University Library of Munich, Germany.
    2. Markus Hoermann & Andreas Schabert, 2011. "When is Quantitative Easing effective?," Tinbergen Institute Discussion Papers 11-001/2/DSF 6, Tinbergen Institute.

    More about this item

    Keywords

    Interest rates; Zero lower bound; Quantitative easing; Expectations; Deflation trap; Liquidity trap;
    All these keywords.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ime:imemes:v:24:y:december:i:s1:p:13-26. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kinken (email available below). General contact details of provider: https://edirc.repec.org/data/imegvjp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.