Zero interest-rate policy

The ZIRP is an important milestone in monetary policy because the central bank is typically no longer able to reduce nominal interest rates.

ZIRP is very closely related to the problem of a liquidity trap, where nominal interest rates cannot adjust downward at a time when savings exceed investment.

In his paper on this topic, Michael Woodford finds that, in a ZIRP situation, the optimal policy for government is to spend enough in stimulus to cover the entire output gap.

[4] Chris Modica and Warren Sulmasy find that the ZIRP policy follows from the need to refinance a high level of US public debt and from the need to recapitalize the world's banking system in the wake of the Financial crisis of 2007–2008.

[5] The zero lower bound problem refers to a situation in which the short-term nominal interest rate is zero, or just above zero, causing a liquidity trap and limiting the capacity that the central bank has to stimulate economic growth.

Japan bonds
Inverted yield curve in 1990
Zero interest-rate policy starting in 1999 [ 1 ]
Negative interest rate policy started in 2014
30 year
20 year
10 year
5 year
2 year
1 year
Japan money supply and inflation (year over year)
M2 money supply
Inflation
US inflation rates