Zero lower bound
{{Short description|Problem in macroeconomics}}
The zero lower bound (ZLB) or zero nominal lower bound (ZNLB) is a macroeconomic problem that occurs when the short-term nominal interest rate is at or near zero, causing a liquidity trap and limiting the central bank's capacity to stimulate economic growth.
The root cause of the ZLB is the issuance of paper currency by central banks, effectively guaranteeing a zero nominal interest rate and acting as an interest rate floor. Central banks cannot encourage spending by lowering interest rates, because people would simply hold cash instead. However, several central banks were able to reduce interest rates below zero; for example, the Czech National Bank estimates that the lower limit on its interest rate is below −1%.{{Cite web|url=https://www.cnb.cz/en/economic-research/research-publications/cnb-working-paper-series/Estimating-the-Effective-Lower-Bound-for-the-Czech-National-Banks-Policy-Rate-00001/ |title=Estimating the Effective Lower Bound on the Czech National Bank's Policy Rate|website=Czech National Bank}}
The problem of the ZLB returned to prominence with Japan's experience during the 1990s, and more recently with the subprime crisis. The belief that monetary policy under the ZLB was effective in promoting economy growth has been critiqued by Paul Krugman, Gauti Eggertsson, and Michael Woodford among others.
Alternatives
Milton Friedman, on the other hand, argued that a zero nominal interest rate presents no problem for monetary policy. According to Friedman, a central bank can increase the monetary base even if the interest rate vanishes; it only needs to continue buying bonds.[http://www.bankofcanada.ca/wp-content/uploads/2010/08/keynote.pdf Milton Friedman's Keynote address at the Bank of Canada] Friedman also coined the term "helicopter drops" to illustrate how central banks could always generate spending and inflation. Friedman used the example of a helicopter flying over a town dropping dollar bills from the sky, which households then gathered in perfectly equal shares. Economists have argued that real-world versions of this idea would work at the zero lower bound. Typically, helicopter drops have been interpreted as involving the central bank directly financing the budget deficit.{{cite web|url=http://www.voxeu.org/article/helicopter-money-policy-option|title=Helicopter money as a policy option|work=voxeu.org|last1=Reichlin|first1=L.|last2= Turner|first2=A.|last3=Woodford|first3= M|date=2013-05-20}}
The economist Willem Buiter has argued that helicopter money can always raise demand and inflation.[http://www.economics-ejournal.org/economics/journalarticles/2014-28 Buiter, W. The Simple Analytics of Helicopter Money] Following the repeated struggles of the European Central Bank to revive the Eurozone economy and meet its inflation objective, a number of economists have taken a more literal interpretation of Friedman's parable and suggested that the European Central Bank should transfer cash directly to households.[http://www.markblyth.com/wp-content/uploads/2013/07/Print-Less-but-Transfer-More.pdf Print Less, but Transfer More, Foreign Affairs, Blyth, M., Lonergan, E]{{cite journal|last=Goodhart|first=C.A.E.|title=The Potential Instruments of Monetary Policy|date=January 2013|series=Financial Markets Group Paper|issue=Special Paper 219|url=http://www2.lse.ac.uk/fmg/workingPapers/specialPapers/PDF/SP219.pdf|access-date=13 April 2013|at=9-10|publisher=London School of Economics|issn=1359-9151}}{{cite journal|last=Blinder|first=Alan S.|title=Revisiting Monetary Policy in a Low-Inflation and Low-Utilization Environment|journal=Journal of Money, Credit and Banking|date=February 2012|volume=44|issue=Supplement s1|pages=141–146|doi=10.1111/j.1538-4616.2011.00481.x}}
Miles Kimball suggested that a modern economy either fully relying on digital currency or defining electronic money as the unit of account could eliminate the ZLB.[http://blog.supplysideliberal.com/post/119337047479/18-misconceptions-about-eliminating-the-zero-lower 18 Misconceptions about Eliminating the Zero Lower Bound]
See also
- Negative interest on excess reserves
- Negative interest rate
- Zero interest-rate policy
- Secular stagnation
- Shadow rate, which can be used to model interest rates near the zero lower bound
References
{{Reflist}}
External links
- Keister, Todd (November 16, 2011). [https://libertystreeteconomics.newyorkfed.org/2011/11/why-is-there-a-zero-lower-bound-on-interest-rates.html Why Is There a “Zero Lower Bound” on Interest Rates?] Federal Reserve Bank of New York. Liberty Street Economics blog. Retrieved 2 April 2020.
- [https://www.economist.com/blogs/freeexchange/2012/01/monetary-policy The zero lower bound in our minds] on Economist.com
- [https://fraser.stlouisfed.org/title/677/item/23280/content/pdf/fomc20081212memocombined Notes on Issues Related to the Zero Lower Bound on Nominal Interest Rates], December 12, 2008
{{2008 economic crisis}}
{{Central banks}}