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The Zero Interest Rate Floor (ZIF) and its Implications for Monetary Policy in Japan

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Listed:
  • Benjamin Hunt

    (bhunt@imf.org)

  • Douglas Laxton

    (International Monetary Fund, dlaxton@imf.org)

Abstract

This paper uses the IMF’s macroeconomic model MULTIMOD to examine the implications of the zero interest rate floor (ZIF) for the design of monetary policy in Japan. Similar to findings in other studies, targeting rates of inflation lower than 2.0 per cent significantly increases the likelihood of the ZIF becoming binding. Systematic monetary policy strategies that respond strongly to stabilise output and inflation, or that incorporate some explicit price-level component, can help to mitigate the implications of the ZIF.

Suggested Citation

  • Benjamin Hunt & Douglas Laxton, 2004. "The Zero Interest Rate Floor (ZIF) and its Implications for Monetary Policy in Japan," National Institute Economic Review, National Institute of Economic and Social Research, vol. 187(1), pages 76-92, January.
  • Handle: RePEc:sae:niesru:v:187:y:2004:i:1:p:76-92
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    References listed on IDEAS

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    3. Laxton, Douglas & N'Diaye, Papa & Pesenti, Paolo, 2006. "Deflationary shocks and monetary rules: An open-economy scenario analysis," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 665-698, December.
    4. Peter Tulip, 2014. "Fiscal Policy and the Inflation Target," International Journal of Central Banking, International Journal of Central Banking, vol. 10(2), pages 63-96, June.
    5. Ortiz, Marco, 2014. "Fat-Tailed Shocks and the Central Bank Reaction," Working Papers 2014-002, Banco Central de Reserva del Perú.
    6. von Hagen, Jurgen & Hofmann, Boris, 2004. "Macroeconomic implications of low inflation in the euro area," The North American Journal of Economics and Finance, Elsevier, vol. 15(1), pages 5-23, March.
    7. Shin-Ichi Nishiyama, 2009. "Monetary Policy Lag, Zero Lower Bound, and Inflation Targeting," Staff Working Papers 09-2, Bank of Canada.
    8. Günter Coenen & Volker W. Wieland, 2004. "Exchange-Rate Policy and the Zero Bound on Nominal Interest Rates," American Economic Review, American Economic Association, vol. 94(2), pages 80-84, May.
    9. Erceg, Christopher J. & Jakab, Zoltan & Lindé, Jesper, 2021. "Monetary policy strategies for the European Central Bank," Journal of Economic Dynamics and Control, Elsevier, vol. 132(C).
    10. Dag Kolsrud, 2008. "Stochastic Ceteris Paribus Simulations," Computational Economics, Springer;Society for Computational Economics, vol. 31(1), pages 21-43, February.
    11. Daniel Leigh, 2004. "Monetary Policy and the Dangers of Deflation:Lessons from Japan," Economics Working Paper Archive 511, The Johns Hopkins University,Department of Economics.
    12. Fuchi, Hitoshi & Oda, Nobuyuki & Ugai, Hiroshi, 2008. "Optimal inflation for Japan's economy," Journal of the Japanese and International Economies, Elsevier, vol. 22(4), pages 439-475, December.
    13. Yuki Teranishi, 2003. "Zero Bound on Nominal Interest Rates and Ex Ante Positive Inflation: A Cost Analysis," Bank of Japan Working Paper Series 03-E-8, Bank of Japan.

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