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Overcoming Zero Lower Bound on Interest Rate without any Inflation or Inflationary Expectations

Author

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  • Gurbachan Singh

    (Gurbachan Singh, Economics and Planning Unit, Indian Statistical Institute, Delhi Centre, Sansanwal Marg, New Delhi. E-mail: gurbachan.arti@gmail.com.)

Abstract

There is a widespread view that inflation or inflationary expectations are the only way to overcome the zero lower bound on interest rate. This article shows that this is not true. It is shown that a tax-subsidy scheme can be used to overcome the zero lower bound on interest rate—without any inflation or inflationary expectations. A simple ‘old’ Keynesian model is used though the treatment is novel and in-depth. The article ends with a discussion that suggests that the ‘non-inflation solution’ is superior to the ‘inflation solution’ under some conditions. JEL Classification: E31m E43, E63. The difficulty lies, not in the new ideas, but in escaping from the old ones … . (John Maynard Keynes, 1936)

Suggested Citation

  • Gurbachan Singh, 2014. "Overcoming Zero Lower Bound on Interest Rate without any Inflation or Inflationary Expectations," South Asian Journal of Macroeconomics and Public Finance, , vol. 3(1), pages 1-38, June.
    • Handle: RePEc:sae:smppub:v:3:y:2014:i:1:p:1-38
    DOI: 10.1177/2277978714525308
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    References listed on IDEAS

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    More about this item

    Keywords

    Zero lower bound on interest rate; inflation; fiscal policy; monetary policy; government budget constraint;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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