The Zero Bound Based on 2004 Bernanke speech “Conducting Monetary Policy at Very Low Short-Term Interest Rates”

The Zero Bound Japan in the 1990s Liquidity trap: interest rate at zero, banks hold all monetary injections as reserves Inflation rate was negative from 1999 to 2004

The Zero Bound As the 1990s went on, the inflation rate and the expected inflation rate became negative Overnight interest rate: –2001: 0.002% –2002: 0.002% –2003: 0.001% –2004: 0.002% Japan had clearly hit the lower bound.

The Zero Bound Switzerland In 2003, Switzerland also came close to the zero bound (Figure 2)

The Zero Bound United States –Bernanke speech 2004 outlines three strategies for dealing with the zero bound 1.affecting interest rate expectations 2.altering the composition of assets held by the central bank 3.expanding the size of the central bank balance sheet

The Zero Bound First idea: the central bank could take action to change people’s expectations of future interest rates

The Zero Bound Second idea: influence the yield curve by having the Fed buy more long-term securities in the open market, rather than short-term securities

The Zero Bound Third idea: the central bank could increase the size of its balance sheet, essentially printing new dollar bills and buying securities in the open market

The Zero Bound Bernanke’s conclusion: –Central bank must take strong steps before public thinks it is running out of ammunition