Zero lower bound

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The Zero Lower Bound (ZLB) or Zero Nominal Lower Bound (ZNLB) is a macroeconomic problem that occurs when the short-term nominal interest rate is at or near zero, causing a liquidity trap and limiting the capacity that the central bank has to stimulate economic growth. This problem returned to prominence with Japan's experience during the 90's, and more recently with the subprime crisis. The belief that monetary policy under the ZLB was effective in promoting economy growth has been critiqued by Paul Krugman, Gauti Eggertsson, and Michael Woodford among others. Milton Friedman, on the other hand, argued that a zero nominal interest rate presents no problem for monetary policy. According to Friedman, a central bank can increase the monetary base even if the interest rate vanishes; it only needs to continue buying bonds.[1] Friedman also coined the term "helicopter drops" to illustrate how central banks could always generate spending and inflation. Friedman used the example of a helicopter flying over a town dropping dollar bills from the sky, which households then gathered in perfectly equal shares. Economists have argued that real-world versions of this idea would work at the zero lower bound. Typically, helicopter drops have been interpreted as involving the central bank directly financing the budget deficit. [2] The economist Willem Buiter has argued that helicopter drops can always raise demand and inflation.[3] Following the repeated struggles of the European Central Bank to revive the Eurozone economy and meet its inflation objective, a number of economists have taken a more literal interpretation of Friedman's parable and suggested that the European Central Bank should transfer cash directly to households.[4] [5][6]

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References[edit]

  1. ^ Milton Friedman's Keynote address at the Bank of Canada
  2. ^ Reichlin, L.; Turner, A.; Woodford, M. "Helicopter money as a policy option". voxeu.org. 
  3. ^ Buiter, W. The Simple Analytics of Helicopter Money
  4. ^ Print Less, but Transfer More, Foreign Affairs, Blyth, M., Lonergan, E
  5. ^ Goodhart, C.A.E. (January 2013). "The Potential Instruments of Monetary Policy" (PDF). Financial Markets Group Paper (Special Paper 219). London School of Economics. 9-10. ISSN 1359-9151. Retrieved 13 April 2013. 
  6. ^ Blinder, Alan S. (February 2012). "Revisiting Monetary Policy in a Low-Inflation and Low-Utilization Environment". Journal of Money, Credit and Banking 44 (Supplement s1): 141–146. doi:10.1111/j.1538-4616.2011.00481.x. Retrieved 13 April 2013. 

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