#zero lower bound

[econ307]

How big a problem is the zero lower bound on interest rates?

Ben Bernanke discusses the implications for monetary policy of the fact that interest rates cannot fall (much) below zero.

[mamomvpy]

If anything the Bank of Canada should ease monetary conditions

If anything the Bank of Canada should ease monetary conditions

While the Federal Reserve – rightly or wrongly – has initiated a rate hike cycle it is not given the the central bank in neighboring Canada should follow suit. In fact, according to our our composited indicator for Canada monetary conditions monetary policy is too tight for the the Bank of Canada to hit its 2% inflation over the medium-term. The Bank of Canada later today will announce its rate…

View On WordPress

[tnelms]

Two thoughts on the Fed’s raising of interest rates today. The question I keep seeing is “why?” It’s clear that there is little-to-no inflation on the horizon, and so the risks of raising rates outweigh -- perhaps significantly -- the risks of not raising rates. So what gives?

1) One answer -- basically the one Yellin gestured to today, I gather -- is that the Fed simply wanted to raise interest rates now so they could cut them later. That’s maybe too glib. The Fed is worried about the economy tanking and not being able to cut rates any lower than (just below) zero, and they saw an opportunity now to give themselves a bit of cushion while taking a moderate risk; better that moderate risk now and at least have some monetary policy in their back pocket later than take on the more extreme risk of having the economy tank anyway and *not* having the possibility of cutting rates. This is the pressure of the zero lower bound.

2) Second possibility: The Fed raised rates because they’ve been saying they were going to raise rates. That is, they’ve been setting everyone up one way, and to all of a sudden *not* raise rates would, so the theory goes, “send the wrong message” -- namely, that the economy isn’t as strong as they’ve been suggesting and/or (even worse) the Fed itself isn’t as reliable or trustworthy as suggested -- and conjure some of those “animal spirits” and panicky decision-making. This is the pressure of generalized expectations.

These are obviously not mutually exclusive.

[econ491]

Zero Interest Rate

Read Krugman here, here and here on liquidity trap (zero lower bound, zero interest rate). I've given up on looking for something better, I will continue, meanwhile if you find a good explanation let me know.

As for questions, I want you to think about following predictions using models/graphs:

1. When interest is zero, government investment does not crowd out public investment. Use market for loanable funds for this question.

2. When interest is zero, increasing money supply does not decrease interest rate. Use money market model for that.

3. When interest is zero, higher prices do not lead to higher aggregate demand. So, part of aggregate demand is vertical. Use money market to modify aggregate demand part of AS/AD model.

4. When interest is zero, expansionary monetary policy does not cause inflation. Use modified AD/AS model.

5. When interest is zero, lower wages do not end recession. Use modified AD/AS model.

[mamomvpy]

Riksbanken moves close to the ZLB - Now it is time to give Bennett McCallum a call

Riksbanken moves close to the ZLB – Now it is time to give Bennett McCallum a call

In a very surprising move the Swedish Riksbank this morning cut its key policy rate by 50bp to 0.25%. It was about time! The Riksbank has for a very long time undershot its 2% inflation target and inflation expectations have consistently been below 2% for a long time as well.

The interesting question now is what is next? The Riksbank is now very close to the Zero Lower Boundand with inflation…

View On WordPress