Zero interest-rate policy ( ZIRP ) is a macroeconomic concept describing conditions with a very low nominal interest rate , such as those in contemporary Japan and December 2008 through December 2015 in the United States. ZIRP is considered to be an unconventional monetary policy instrument and can be associated with slow economic growth , deflation , and deleverage . [1]


Under ZIRP, the central bank maintains a 0% nominal interest rate . The ZIRP is an important milestone in monetary policy because the central bank is no longer able to reduce nominal interest rates. Conventional monetary policy is at its maximum potential to drive growth under ZIRP. ZIRP is very close to the problem of a liquidity trap , where nominal interest rates can not adjust downward at a time.

However, some economists-such as market monetarists -believe that unconventional monetary policy such as quantitative easing can be effective at the zero lower bound.

Others argue that when monetary policy is already used to maximum effect, governments must use fiscal policy . The fiscal multiplier of government spending is expected to be larger when nominal interest rates are zero. Keynesian economics holds that the multiplier is above one, meaning government spending effectively boosts output. In his paper on this topic, Michael Woodford finds that, in a ZIRP situation, the optimal policy for government is enough to stimulate the entire output gap . [2]

Modica and Chris Warren Sulmasy find que la 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 . [3]

Zero lower bound

The zero lower bound problem is a short-term nominal interest rate that is zero, or just above zero, causing a liquidity trap and limiting the capacity of the central bank to stimulate economic growth. This problem has to be prominent with the Japan’s experience during the 90’s , and more recently with the subprime crisis . The belief That monetary policy under the ZLB Effective in Promoting Was economy growth has-been critiqued by Economists 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. [4] . (Note: The quote from footnote # 3 May be misleading Friedman Was talking about Japan in 1989. When Japan’s very tight monetary policy Produced deflation qui resulted in a zero interest rate Friedman Was not exactly Advocating the “. Quantitative easing “That’s been the Fed’s strategy from 2008 to 2014. (7/30/2014))

See also

  • History of Federal Open Market Committee
  • Janet Louise Yellen
  • Ben Bernanke
  • Excess reserves
  • Federal funds rate
  • Forward guidance
  • Negative interest rate
  • Real interest rate
  • stagflation


  1. Jump up^ Roubini, Nouriel (January 14, 2016). “Troubled Global Economy” . Time Magazine . . Retrieved 5 February 2016 .
  2. Jump up^ Woodford, Michael (2011). “Simple Analytics of the Government Expenditure Multiplier”. American Economic Journal . 3 (1): 1-35. Doi : 10.1257 / mac.3.1.1 .
  3. Jump up^ Modica, Chris; Sulmasy, Warren (March 27, 2013). “Why the Federal Reserve Bank Has a Near Zero Interest Rate Policy” . Yahoo! Finance .
  4. Jump up^ “Milton Friedman’s Keynote address at the Bank of Canada” (PDF) .