What happens when interest rates are near zero and central banks cannot lower rates further to stimulate growth?
Understand the Problem
The question asks about the economic implications of interest rates being near zero, specifically what tools or policies central banks and governments can use when they cannot lower rates further to encourage economic growth.
Answer
Central banks use unconventional monetary policies like quantitative easing to stimulate growth when rates are near zero.
When interest rates are near zero and central banks cannot lower them further, they often implement unconventional monetary policies like quantitative easing. This involves purchasing long-term securities to inject liquidity into the economy. However, banks might not lend more due to low incentive at zero rates.
Answer for screen readers
When interest rates are near zero and central banks cannot lower them further, they often implement unconventional monetary policies like quantitative easing. This involves purchasing long-term securities to inject liquidity into the economy. However, banks might not lend more due to low incentive at zero rates.
More Information
When central banks can't lower interest rates further, they may turn to policies like quantitative easing to attempt to stimulate economic growth by increasing the money supply and decreasing long-term interest rates. Despite this, banks may still choose to hold cash instead of lending due to low returns.
Tips
It's a common mistake to assume that monetary policy is ineffective at zero interest rates. Understanding unconventional tools like quantitative easing is essential.
Sources
- Quantitative Easing (QE): What It Is and How It Works - Investopedia - investopedia.com
- Economic Commentary: Conducting Monetary Policy When Interest Rates are Near Zero - clevelandfed.org
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