Friday, June 6, 2014

What Zero Lower Bound

There is a notion in economics that monetary policy is ineffective when interest rates approach zero. The theory posits, among other things, that interest rates can't fall below zero, and near the zero lower bound, there is nothing more the monetary authorities can do to stimulate the economy. The Fed's pursuit of quantitative easing, buying financial assets in the open market, contradicts the zero lower bound proponents, including most Keynesians and Krugram.

But in any case, what zero lower bound?

European Central Bank Cuts Deposit Rate to Negative
The European Central Bank cut its benchmark interest rate to a record low on Thursday and, in an unprecedented attempt to stimulate the euro zone economy, said it would begin charging interest on deposits held by the bank.
The so-called negative deposit rate has never been tried on such a large scale and is a bid to push down the value of the euro and encourage banks to invest excess cash rather than hoarding it in central bank vaults.
The European Central Bank cut its benchmark interest rate to 0.15 percent from 0.25 percent, and the deposit rate to minus 0.10 percent from zero.
Those actions had become all but certain after data earlier in the week showed that inflation in the euro zone fell to an annual rate of 0.5 percent in May, a level considered perilously low.

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