View source for Finance:Zero interest-rate policy

{{Short description|Macroeconomic concept describing conditions with a very low nominal interest rate}}

[[File:Japan bonds.webp|thumb|300px|Japan bonds <br> [[Inverted yield curve]] in 1990 <br>
Zero interest-rate policy starting in 1995 <br> 
[[Finance:Negative interest on excess reserves|Negative interest rate policy]] started in 2014
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[[File:Japan money supply and inflation.webp|thumb|300px|Japan money supply and inflation (year over year)
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[[File:US inflation rates.jpg|thumb|US inflation rates]]

'''Zero interest-rate policy''' ('''ZIRP''') is a macroeconomic concept describing conditions with a very low [[Finance:Nominal interest rate|nominal interest rate]], such as those in contemporary Japan and in the [[Finance:Federal Reserve System|United States]] from December 2008 through December 2015 and again from March 2020 until March 2022 as a result of the COVID-19 pandemic. ZIRP is considered to be an [[Finance:Monetary policy#Unconventional monetary policy at the zero bound|unconventional monetary policy]] instrument and can be associated with slow [[Finance:Economic growth|economic growth]], [[Finance:Deflation|deflation]] and [[Finance:Deleveraging|deleverage]].<ref>{{cite web|last1=Roubini|first1=Nouriel|title=Troubled Global Economy|url=http://time.com/4180698/nouriel-roubini-global-economy/|website=Time Magazine|publisher=time.com|access-date=5 February 2016|date=January 14, 2016}}</ref>

==Overview==
Under ZIRP, the [[Finance:Central bank|central bank]] maintains a 0% [[Finance:Nominal interest rate|nominal interest rate]]. The ZIRP is an important milestone in [[Finance:Monetary policy|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 [[Finance:Liquidity trap|liquidity trap]], where nominal interest rates cannot adjust downward at a time when savings exceed investment.

However, some economists—such as [[Finance:Market monetarism|market monetarists]]—believe that unconventional monetary policy such as [[Finance:Quantitative easing|quantitative easing]] can be effective at the zero lower bound.{{cn|date=August 2019}}

Others argue that when monetary policy is already used to the maximal extent, governments must be willing to use [[Finance:Fiscal policy|fiscal policy]] to create jobs. The [[Finance:Fiscal multiplier|fiscal multiplier]] of government spending is expected to be larger when nominal interest rates are zero than they would be when nominal interest rates are above zero. [[Finance:Keynesian economics|Keynesian economics]] holds that the multiplier is above one, meaning government spending effectively boosts output.  In his paper on this topic, [[Biography:Michael Woodford (economist)|Michael Woodford]] finds that, in a ZIRP situation, the optimal policy for government is to spend enough in stimulus to cover the entire [[Finance:Output gap|output gap]].<ref>{{cite journal |last=Woodford |first=Michael |year=2011 |title=Simple Analytics of the Government Expenditure Multiplier |journal=[[Finance:American Economic Journal|American Economic Journal]] |volume=3 |issue=1 |pages=1–35 |doi=10.1257/mac.3.1.1 |citeseerx=10.1.1.183.9546 |s2cid=11575586 }}</ref>

Chris Modica and Warren Sulmasy find that the ZIRP policy follows from the need to refinance a high level of US public debt and from the need to recapitalize the world's banking system in the wake of the [[Finance:Financial crisis of 2007–2008|Financial crisis of 2007–2008]].<ref>{{cite news |first1=Chris |last1=Modica |first2=Warren |last2=Sulmasy |title=Why the Federal Reserve Bank Has a Near Zero Interest Rate Policy |work=Yahoo! Finance |url=https://finance.yahoo.com/news/why-federal-bank-near-zero-143000544.html |archive-url=https://archive.today/20130630172914/http://finance.yahoo.com/news/why-federal-bank-near-zero-143000544.html |url-status=dead |archive-date=June 30, 2013 |date=March 27, 2013}}</ref>

==Zero lower bound==
The zero lower bound problem refers to a situation in which the short-term nominal interest rate is zero, or just above zero, causing a [[Finance:Liquidity trap|liquidity trap]] and limiting the capacity that the central bank has to stimulate economic growth. This problem returned to prominence with the 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 economists [[Biography:Paul Krugman|Paul Krugman]], Gauti Eggertsson and [[Biography:Michael Woodford (economist)|Michael Woodford]] among others.{{cn|date=August 2019}} [[Biography:Milton Friedman|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 [[Finance:Monetary base|monetary base]] only if it continues buying bonds.<ref>{{cite web|url=http://www.bankofcanada.ca/wp-content/uploads/2010/08/keynote.pdf|title=Milton Friedman's Keynote address at the Bank of Canada}}</ref>

==See also==
{{div col|colwidth=28em}}
* History of Federal Open Market Committee actions
* [[Biography:Janet Yellen|Janet Yellen]]
* [[Biography:Ben Bernanke|Ben Bernanke]]
* [[Finance:Excess reserves|Excess reserves]]
* [[Finance:Federal funds rate|Federal funds rate]]
* [[Finance:Forward guidance|Forward guidance]]
* Negative interest rate
* [[Finance:Natural rate of interest|Natural rate of interest]]
* [[Finance:Real interest rate|Real interest rate]]
* [[Finance:Stagflation|Stagflation]]
* Speculative bubble
* [[Finance:Too big to fail|Too big to fail]]
* [[Finance:Yield Curve Control|Yield Curve Control]]
{{div col end}}

==References==
{{reflist}}

==Further reading==
*{{cite journal |last=Eggertsson |first=Gauti B. |author2=Woodford, Michael  |year=2003 |title=The Zero Bound on Interest Rates and Optimal Monetary Policy |journal=Brookings Papers on Economic Activity |volume=2003 |issue=1 |pages=139–211 |doi= 10.1353/eca.2003.0010|jstor=1209148|citeseerx=10.1.1.603.7748 |s2cid=153895795 }}

==External links==
*[http://www.federalreserve.gov/pubs/feds/2004/200448/200448pap.pdf Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment]
*[http://seekingalpha.com/article/106271-fed-funds-rate-turning-japanese-i-really-think-so Fed Funds Rate: Turning Japanese, I Really Think So]
*[http://research.stlouisfed.org/publications/mt/19990101/cover.pdf Nominal Interest Rates: Less Than Zero?]
*[http://macroeconomicanalysis.com/macroeconomics-wikipedia/zero-lower-bound-problem/ Macroeconomics Wiki: Zero Lower Bound Problem]

{{2008 economic crisis}}

{{DEFAULTSORT:Zero Interest Rate Policy}}
[[Category:Interest rates]]
[[Category:Monetary policy]]

{{Sourceattribution|Zero interest-rate policy}}