Zero-Bound Interest Rate: Meaning, History, Crisis Tactics

A zero-bound interest rate is a central bank policy in which the interest rate is set at or below zero. This policy is used to stimulate the economy during a recession or financial crisis.

The zero lower bound (ZLB) is the point at which the nominal interest rate can no longer be reduced. This is because the nominal interest rate is the difference between the real interest rate and the inflation rate. When the inflation rate is zero, the nominal interest rate cannot be negative.

The zero-bound interest rate was first used by the Bank of Japan in 1999 during the Japanese asset price bubble. The policy was also used by the European Central Bank (ECB) during the European debt crisis.

The zero-bound interest rate has a number of effects on the economy. First, it lowers the cost of borrowing for businesses and consumers. This can lead to increased investment and spending, which can boost economic growth. Second, the zero-bound interest rate can lead to a depreciation of the currency. This can make exports more competitive and boost economic growth.

However, the zero-bound interest rate also has a number of drawbacks. First, it can lead to financial instability. This is because when the interest rate is too low, it can encourage excessive risk-taking. Second, the zero-bound interest rate can lead to a decline in the value of savings. This is because when the interest rate is low, the return on savings is also low.

Overall, the zero-bound interest rate is a controversial policy. Some economists believe that it is an effective tool for stimulating the economy during a recession or financial crisis. However, others believe that the policy has a number of drawbacks and can lead to financial instability.

The zero-bound interest rate is a relatively new policy, and there is still much debate about its effectiveness. However, it is clear that the zero-bound interest rate is a powerful tool that can have a significant impact on the economy.