The zero-lower bound on interest rates: Myth or reality?

Robert Jarrow ()

Finance Research Letters, 2013, vol. 10, issue 4, 151-156

Abstract: Unconventional monetary policy tools are based on the belief that there exists a zero-lower bound on interest rates. This paper argues, based on economic theory and the empirical evidence, that this belief is a myth and not a reality. It is shown that a negative default-free spot rate of interest is consistent with an arbitrage-free term structure evolution in a competitive and nearly frictionless market. It is not frictionless to the extent that consumers, firms, non-bank financial institutions, and banks have some realistic constraints imposed on their trading activities.

Keywords: Zero-lower bound on interest rates; Monetary policy; Quantitative easing; Term structure of interest rate models; The HJM model; Convenience yields (search for similar items in EconPapers)
JEL-codes: E43 E44 G12 G21 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:10:y:2013:i:4:p:151-156

DOI: 10.1016/j.frl.2013.08.003

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