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Reducing the lower bound on market interest rates

  • Ulrich van Suntum
  • Metin Kaptan
  • Cordelius Ilgmann

This paper critically discusses three proposals to overcome the zero interest bound, which have recently been proposed by prominent economists. We trace back the historical origins of these proposals, reaching back to the late 19th century, and comment on their theoretical and practical deficiencies. We propose a much simpler method to spur real investment in times of a deep recession, based on long term central bank loans with low but non-negative base rates. With the prospect of decreasing default risks after the recession, this measure has a similar effect like negative base rates in time of crisis. We therefore hope to convey the message that the effects of the zero interest bound can at least be mitigated without substantially changing the existing monetary regime.

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Paper provided by Institute of Spatial and Housing Economics, Munster Universitary in its series Working Papers with number 200103.

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Handle: RePEc:muc:wpaper:200103
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  1. Jung, Taehun & Teranishi, Yuki & Watanabe, Tsutomu, 2005. "Optimal Monetary Policy at the Zero-Interest-Rate Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 813-35, October.
  2. Buiter, Willem H., 2009. "Negative Nominal Interest Rates: Three ways to overcome the zero lower bound," CEPR Discussion Papers 7346, C.E.P.R. Discussion Papers.
  3. Yates, Tony, 2002. "Monetary policy and the zero bound to interest rates: a review," Working Paper Series 0190, European Central Bank.
  4. Evans, George W. & Guse, Eran & Honkapohja, Seppo, 2007. "Liquidity Traps, Learning and Stagnation," CEPR Discussion Papers 6355, C.E.P.R. Discussion Papers.
  5. Garvy, George, 1975. "Keynes and the Economic Activists of Pre-Hitler Germany," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 391-405, April.
  6. Buiter, Willem H. & Sibert, Anne, 2006. "Deflationary Bubbles," CEPR Discussion Papers 5637, C.E.P.R. Discussion Papers.
  7. Willem Buiter, 2005. "Overcoming the zero bound on nominal interest rates: Gesell’s currency carry tax vs. Eisler’s parallel virtual currency," International Economics and Economic Policy, Springer, vol. 2(2), pages 189-200, November.
  8. Michael D. Bordo & Andrew Filardo, 2004. "Deflation and Monetary Policy in a Historical Perspective: Remembering the Past or Being Condemned to Repeat It?," NBER Working Papers 10833, National Bureau of Economic Research, Inc.
  9. Willem H. Buiter & Nikolaos Panigirtzoglou, 1999. "Liquidity Traps: How to Avoid Them and How to Escape Them," NBER Working Papers 7245, National Bureau of Economic Research, Inc.
  10. Mitsuhiro Fukao, 2005. "The effects of ‘Gesell’ (Currency) taxes in promoting Japan's economic recovery," International Economics and Economic Policy, Springer, vol. 2(2), pages 173-188, November.
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