The lower bound on interest rates and ways to overcome it

Abstract

Expansionary monetary policy was traditionally thought to be restricted by the zero lower bound on nominal interest rates. Yet since 2014, some central banks, facing secular stagnation and deflationary traps, have pushed key policy rates below zero. This paper reviews the theoretical literature on the zero lower bound and proposals to overcome it. It concludes that such proposals are primarily designed to discourage cash hoarding, and their success depends on the economic and cultural environment in which they are to be implemented.

Keywords

• Interest rates
• Lower bounds
• Monetary Policy
• Cash hoarding
• Central banking