Reducing the Lower Bound on Market Interest Rates

van Suntum Ulrich, Kaptan Metin, Ilgmann Cordelius


Abstract
This paper critically discusses three proposals to overcome the zero interest bound, which have recently been proposed by prominent economists. We trace back the historical origins of these proposals, reaching back to the late 19th century, and comment on their theoretical and practical deficiencies. We propose a much simpler method to spur real investment in times of a deep recession, based on long term central bank loans with low but non-negative base rates. With the prospect of decreasing default risks after the recession, this measure has a similar effect like negative base rates in time of crisis. We therefore hope to convey the message that the effects of the zero interest bound can at least be mitigated without substantially changing the existing monetary regime.

Keywords
negative interest rates; lower zero bound; monetary policy



Publication type
Article in Journal

Peer reviewed
Yes

Publication status
Published

Year
2011

Journal
Economic Analysis and Policy

Volume
2011

Issue
41

Start page
133

End page
146

Pages range
133-146

Language
English

ISSN
0313-5926