TY - JOUR
T1 - Zero Lower Bound and negative interest rates
T2 - Choices for monetary policy in the UK
AU - Nasir, Muhammad Ali
PY - 2020/5/26
Y1 - 2020/5/26
N2 - There have been relatively few analyses of the policy context and consequences of a Zero Lower Bound (ZLB) for nominal interest rates. This paper sets out monetary policy alternatives, including negative interest rates, a revision of the inflation target, and rendering unconventional policy instruments such as QE conventional (permanent). Following extensive discussion of policy options, we set out a model that explores the impacts of the real policy rate on economic growth, employment and inflation, with particular attention to the British economy. We use a Time-Varying Structural Vector Auto-regressive (TVSVAR) Model where the sources of time variation are both the coefficients and variance–covariance matrix of the innovations. It was found that real rates have significant implications for real growth, the labour market and price stability even when monetary policy was constrained at the ZLB in nominal terms. The study additionally applies a discrete break in the data to focus on the Post-Global Financial Crisis and ZLB period. This indicates that the effectiveness of real rates did not diminish and this has important implications in terms of a policy approach which seeks to exploit real negative rates.
AB - There have been relatively few analyses of the policy context and consequences of a Zero Lower Bound (ZLB) for nominal interest rates. This paper sets out monetary policy alternatives, including negative interest rates, a revision of the inflation target, and rendering unconventional policy instruments such as QE conventional (permanent). Following extensive discussion of policy options, we set out a model that explores the impacts of the real policy rate on economic growth, employment and inflation, with particular attention to the British economy. We use a Time-Varying Structural Vector Auto-regressive (TVSVAR) Model where the sources of time variation are both the coefficients and variance–covariance matrix of the innovations. It was found that real rates have significant implications for real growth, the labour market and price stability even when monetary policy was constrained at the ZLB in nominal terms. The study additionally applies a discrete break in the data to focus on the Post-Global Financial Crisis and ZLB period. This indicates that the effectiveness of real rates did not diminish and this has important implications in terms of a policy approach which seeks to exploit real negative rates.
KW - Fiscal policy
KW - Monetary policy
KW - Negative interest rates
KW - Policy coordination
KW - Quantitative easing
KW - TVSVAR model
KW - Zero Lower Bound
UR - http://www.scopus.com/inward/record.url?scp=85086909659&partnerID=8YFLogxK
U2 - 10.1016/j.jpolmod.2020.03.014
DO - 10.1016/j.jpolmod.2020.03.014
M3 - Article
AN - SCOPUS:85086909659
JO - Journal of Policy Modeling
JF - Journal of Policy Modeling
SN - 0161-8938
ER -