Zero-Bound

Definition

The Zero Lower Bound is an expansionary monetary policy tool used when central banks lower short-term interest rates to zero to stimulate the economy. Central banks implementing this policy often need to adopt other unconventional measures to restore economic growth.

Origin

The concept of the Zero Lower Bound originated during Japan's economic stagnation in the 1990s, when the Bank of Japan first lowered interest rates to near zero to stimulate the economy. After the 2008 global financial crisis, many countries' central banks also adopted this policy.

Categories and Features

The Zero Lower Bound policy is mainly divided into two categories: traditional interest rate policies and unconventional monetary policy tools. Traditional policies involve lowering short-term interest rates to zero, while unconventional tools include quantitative easing and forward guidance. These policies are characterized by reducing borrowing costs and increasing market liquidity to stimulate economic activity.

Case Studies

A typical case is the United States' response to the 2008 financial crisis. The Federal Reserve lowered the federal funds rate to near zero and implemented multiple rounds of quantitative easing to support economic recovery. Another example is the European Central Bank's measures in 2014, which included lowering rates to zero and introducing negative interest rates and asset purchase programs.

Common Issues

Investors may encounter issues such as declining investment returns in a low-interest-rate environment and potential market distortions caused by unconventional policies. Additionally, the long-term effects of the Zero Lower Bound policy and exit strategies are common concerns.