Zero Interest Rate Floor (ZIF)
Objective: examine the implications of ZIF for the design of monetary policy in Japan.
Introduction:
• Summers predicted issue of ZIF would be an important matter to monetary policy in an era of low inflation.
• In periods of low interest rates, ZIF might significantly reduce the monetary authority’s ability to reduce real interest rates when output and inflation stabilization objectives were threatened by adverse deflationary shocks to economy.
• Summers prediction has proven to be true with the example of the Japanese economy since the mid-1990s
• Lot of research effort has been devoted to implications of ZIF
o Examines policy channels other than short term nominal interest rate that can be used to stimulate the economy after persistent negative shocks have pushed interest rates down to ZIF
? Consider an increase in government spending
? Monetary Policy Intervention – First Research Track
• 1) Restore any decline in the price level that has occurred because the short term nominal interest rate has been constrained by ZIF
o Can be thought of as a commitment to future inflation
• 2) Sharp depreciation in the nominal exchange rate coupled with a credible commitment to achieve a specified price level target over a medium term
• Both fiscal policy and monetary policy are effective in stimulating economy once ZIF is binding
o Reduce the length of time that the constraint binds thus reducing loss that is incurred
o Monetary policy is more attractive debt ...