Zero interest-rate policy

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Japan bonds
Inverted yield curve in 1990
Zero interest-rate policy starting in 1995
Negative interest rate policy started in 2014
  30 year
  20 year
  10 year
  5 year
  2 year
  1 year
Japan money supply and inflation (year over year)
  M2 money supply
  Inflation
US inflation rates

Zero interest-rate policy (ZIRP) is a

United States from December 2008 through December 2015 and again from March 2020 until March 2022 amid the COVID-19 pandemic. ZIRP is considered to be an unconventional monetary policy instrument and can be associated with slow economic growth, deflation and deleverage.[1]

Overview

Under ZIRP, the central bank maintains a 0% nominal interest rate. The ZIRP is an important milestone in monetary policy because the central bank is typically no longer able to reduce nominal interest rates. ZIRP is very closely related to the problem of a liquidity trap, where nominal interest rates cannot adjust downward at a time when savings exceed investment.

However, some economists—such as market monetarists—believe that unconventional monetary policy such as quantitative easing can be effective at the zero lower bound.[citation needed]

Others argue that when monetary policy is already used to the maximal extent, governments must be willing to use

Michael Woodford finds that, in a ZIRP situation, the optimal policy for government is to spend enough in stimulus to cover the entire output gap.[2]

Chris Modica and Warren Sulmasy find that the ZIRP policy follows from the need to refinance a high level of

Financial crisis of 2007–2008.[3]

Zero lower bound

The

Michael Woodford among others.[citation needed] Milton Friedman, on the other hand, argued that a zero nominal interest rate presents no problem for monetary policy, as a central bank can increase the monetary base only if it continues buying bonds.[4]

See also

References

  1. Time Magazine
    . time.com. Retrieved February 5, 2016.
  2. S2CID 11575586
    .
  3. ^ Modica, Chris; Sulmasy, Warren (March 27, 2013). "Why the Federal Reserve Bank Has a Near Zero Interest Rate Policy". Yahoo! Finance. Archived from the original on June 30, 2013.
  4. ^ "Milton Friedman's Keynote address at the Bank of Canada" (PDF).

Further reading

  • Eggertsson, Gauti B.; Woodford, Michael (2003). "The Zero Bound on Interest Rates and Optimal Monetary Policy". Brookings Papers on Economic Activity. 2003 (1): 139–211.
    S2CID 153895795
    .

External links
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