The Pitfalls of Speed-Limit Interest Rate Rules at the Zero Lower Bound

2013 ◽  
Author(s):  
Charles Brendon ◽  
Matthias Paustian ◽  
Anthony Yates
Keyword(s):  
Interest Rate ◽  
Lower Bound ◽  
Speed Limit ◽  
Zero Lower Bound ◽  
Interest Rate Rules

The Case for Imposing Cashlessness: A Review Article

2018 ◽  
Vol 56 (4) ◽  
pp. 1587-1591
Author(s):  
Neil Wallace
Keyword(s):  
Fiscal Policy ◽  
Interest Rate ◽  
Lower Bound ◽  
Central Bank ◽  
Review Article ◽  
Zero Lower Bound ◽  
Illegal Activity ◽  
The Interest Rate

In The Curse of Cash, Rogoff (2016) makes two arguments. (i) Large denominations of currency are primarily used for illegal activity. Therefore, eliminating them would have benefits that far outweigh the costs in terms of lost seigniorage. (ii) The zero lower bound (ZLB) on the interest rate implied by the possibility of holding large amounts of currency is a costly constraint on central-bank policy. The best way to eliminate the ZLB is to eliminate all but small denominations of currency, ten dollars and lower, and to have those be in the form of coins. The style of the book, no models and no symbols, works fairly well for (i), but not so well for (ii). For (ii), the author is unclear about a crucial matter: what fiscal policy accompanies alternative interest-rate settings chosen by the central bank? ( JEL E26, E42, E43, E52, E58, E62)

scholarly journals The Empirical Implications of the Zero Lower Bound on the Interest Rate: The Case of the Czech Economy

2016 ◽  
Vol 64 (2) ◽  
pp. 603-616 ◽  
Author(s):  
Miroslav Hloušek
Keyword(s):  
Interest Rate ◽  
Lower Bound ◽  
Zero Lower Bound ◽  
Inflation Volatility ◽  
Percentage Points ◽  
Monetary Policy Rule ◽  
Tradable Sector ◽  
The Interest Rate ◽  
Macroeconomic Implications ◽  
Empirical Implications

This paper uses an estimated DSGE model of the Czech economy to study the macroeconomic implications of various shocks when the interest rate is constrained by the zero lower bound. The goal is to identify which shocks represent threats for the economy and how large the distortions are. The results show that four single shocks can take the economy to the zero lower bound, and that of the four, productivity shock in the tradable sector is the most dangerous. The consequences for the behaviour of macroeconomic variables are nontrivial and, quite naturally, increase with the size of the shock and the frequency of occurrence. If the economy is subject to all model specific shocks, there are distortions in terms of lower average values of output and consumption (by more than one percentage point) and higher inflation volatility (by more than six percentage points). To reduce these costs, the central bank should give higher weight to inflation and lower weight to the output gap in monetary policy rule.

scholarly journals A Model of Monetary Transmission Mechanism

2020 ◽  
Author(s):  
Yuuki Maruyama
Keyword(s):  
Interest Rate ◽  
Lower Bound ◽  
Risk Aversion ◽  
Risk Premium ◽  
Market Price ◽  
Zero Lower Bound ◽  
Government Bonds ◽  
Total Investment ◽  
The Interest Rate ◽  
Interest Rate Channel

The point of this model is that total investment in the economy is not determined by the equilibrium of the interest rate alone, but by the equilibrium of both the interest rate and the market price of risk (risk premium). In this model, the lower the discount rate or risk aversion of people, the higher the total investment. This model shows that when the interest rate is not at the zero lower bound, the total investment is only slightly affected by people's risk aversion, but at the zero lower bound, the total investment is inversely proportional to people's risk aversion. In addition, this model is used to analyze monetary policy. It is shown that the interest rate channel and the credit channel can be analyzed with the same formula and the effect of the interest rate channel is small. This explains why a central bank can greatly increase the total investment with small changes in the interest rate. Additionally, this paper analyzes fiscal policy, helicopter money, and government bonds.

scholarly journals Exchange Rate Policies at the Zero Lower Bound

2019 ◽  
Vol 87 (4) ◽  
pp. 1605-1645 ◽  
Author(s):  
Manuel Amador ◽  
Javier Bianchi ◽  
Luigi Bocola ◽  
Fabrizio Perri
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Lower Bound ◽  
Exchange Rate Policy ◽  
Monetary Authority ◽  
Zero Lower Bound ◽  
Foreign Reserves ◽  
Interest Rate Parity ◽  
Covered Interest Parity ◽  
Rate Parity

Abstract We study the problem of a monetary authority pursuing an exchange rate policy that is inconsistent with interest rate parity because of a binding zero lower bound constraint. The resulting violation in interest rate parity generates an inflow of capital that the monetary authority needs to absorb by accumulating foreign reserves. We show that these interventions by the monetary authority are costly, and we derive a simple measure of these costs: they are proportional to deviations from the covered interest parity (CIP) condition and the amount of accumulated foreign reserves. Our framework can account for the recent experiences of “safe-haven” currencies and the sign of their observed deviations from CIP.

scholarly journals Forecast accuracy of a BVAR under alternative specifications of the zero lower bound

2017 ◽  
Vol 21 (2) ◽  
Author(s):  
Tim Oliver Berg
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Lower Bound ◽  
Forecast Accuracy ◽  
Zero Lower Bound ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
Policy Shocks ◽  
Density Forecasts ◽  
Effect Of Monetary Policy

AbstractThis paper discusses how the forecast accuracy of a Bayesian vector autoregression (BVAR) is affected by introducing the zero lower bound on the federal funds rate. As a benchmark I adopt a common BVAR specification, including 18 variables, estimated shrinkage, and no nonlinearity. Then I entertain alternative specifications of the zero lower bound. I account for the possibility that the effect of monetary policy on the economy is different in this regime, replace the federal funds rate by its shadow rate, consider a logarithmic transformation, feed in monetary policy shocks, or utilize conditional forecasts allowing for all shocks implemented through a rejection sampler. The latter two are also coupled with interest rate expectations from future contracts. It is shown that the predictive densities of all these specifications are greatly different, suggesting that this modeling choice is not innocuous. The comparison is based on the accuracy of point and density forecasts of major US macroeconomic series during the period 2009:1 to 2014:4. The introduction of the zero lower bound is not beneficial per se, but it depends on how it is done and which series is forecasted. With caution, I recommend the shadow rate specification and the rejection sampler combined with interest rate expectations to deal with the nonlinearity in the policy rate. Since the policy rate will remain low for some time, these findings could prove useful for practical forecasters.

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