The Zero-Lower Bound on Interest Rates: Myth or Reality?

8 Pages Posted: 30 Apr 2013

See all articles by Robert A. Jarrow

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

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

Jarrow, Robert A., The Zero-Lower Bound on Interest Rates: Myth or Reality? (April 24, 2013). Johnson School Research Paper Series No. 13-2013, Available at SSRN: https://ssrn.com/abstract=2258052 or http://dx.doi.org/10.2139/ssrn.2258052

Robert A. Jarrow (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Finance
Ithaca, NY 14853
United States
607-255-4729 (Phone)
607-254-4590 (Fax)

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