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The Zero Bound on Nominal Interest Rates: How Important Is It?

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  • David Amirault
  • Brian O'Reilly

Abstract

This paper surveys the literature on the zero bound on the nominal interest rate. It addresses questions ranging from the conditions under which the zero bound on the nominal interest rate might occur to policy options to avoid or use to exit from such a situation. We discuss literature that examines historical and country evidence, and literature that uses models to generate evidence on this question. There seems to be a consensus that the probability of encountering the zero bound is relatively low, especially if the inflation target established for the monetary authority is 2 per cent or more. There is some indication in the model work that the likelihood of encountering the zero bound increases at an increasing rate for lower inflation targets. Various caveats apply to drawing conclusions for Canada from the papers we surveyed, among them the paucity of historical experience where a zero bound has occurred, the risk of making inferences using data (or parameters) from different monetary regimes, the relatively few studies using Canadian data, and the weight to give to credibility.

Suggested Citation

  • David Amirault & Brian O'Reilly, 2001. "The Zero Bound on Nominal Interest Rates: How Important Is It?," Staff Working Papers 01-6, Bank of Canada.
  • Handle: RePEc:bca:bocawp:01-6
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    References listed on IDEAS

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    Cited by:

    1. Michal Jurek & Pawel Marszalek, 2015. "Policy alternatives for the relationship between ECB monetary and financial policies and new member states," Working papers wpaper112, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    2. Efrem Castelnuovo, 2002. "Squeezing the Interest Rate Smoothing Weight with a Hybrid Expectations Model," Macroeconomics 0211006, EconWPA.
    3. Al-Jarhi, Mabid Ali, 2005. "The Case For Universal Banking As A Component Of Islamic Banking," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 13, pages 2-65.
    4. Ito, Hiro, 2003. "Was Japan’s Real Interest Rate Really Too High During the 1990s? The Role of the Zero Interest Rate Bound and Other Factors," Santa Cruz Department of Economics, Working Paper Series qt48k5q6vd, Department of Economics, UC Santa Cruz.
    5. St-Amant, Pierre & Tessier, David, 2008. "Déflation et politique monétaire," L'Actualité Economique, Société Canadienne de Science Economique, vol. 84(3), pages 307-323, septembre.

    More about this item

    Keywords

    Inflation targets; Monetary policy transmission; Credibility;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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