The Zero-Lower Bound on Interest Rates: Myth or Reality?
8 Pages Posted: 30 Apr 2013
Date Written: April 24, 2013
Abstract
Unconventional monetary policy tools are based on the belief that there exists a zero-lower bound on interest rates. This paper argues, based on economic theory and the empirical evidence, that this belief is a myth and not a reality. It is shown that a negative default-free spot rate of interest is consistent with an arbitrage-free term structure evolution in a competitive and nearly frictionless market. It is not frictionless to the extent that consumers, firms, non-bank financial institutions, and banks have some realistic constraints imposed on their trading activities.
Keywords: zero-lower bound on interest rates, monetary policy, quantitative easing, term structure of interest rate models, the HJM model, convenience yields
JEL Classification: E43, G12
Suggested Citation: Suggested Citation