Accommodating monetary policy

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.This problem returned to prominence with the Japan's experience during the 90's, and more recently with the subprime crisis.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.The fiscal multiplier of government spending is expected to be larger when nominal interest rates are zero than they would be when nominal interest rates are above zero.Keynesian economics holds that the multiplier is above one, meaning government spending effectively boosts output.

Further progress has been made in understanding the trade-offs and in operationalising such a framework.Meanwhile, there were lingering concerns about the declining effectiveness of domestic channels of monetary policy and about the side effects of persistent accommodation.The external channels, notably the exchange rate, became more prominent and raised challenges of their own.Declining commodity prices weighed heavily on policy considerations.While these developments raised questions about the anchoring of inflation expectations, central banks also had to grapple with conflicting domestic and global inflation cross-currents of a cyclical and secular nature.

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