Zero nominal interest rate bound

Zero matters

The invention of the number zero transformed mathematics and laid the foundations for modern science. Zero is the additive identity (any number plus zero equals itself). It separates the positive and negative numbers. For a celebration of zero, see here.

Zero matters in economics, too.

Zero growth separates cyclical expansions and contractions. We need zeroes to measure the trillions of dollars of GDP, and even more zeroes to measure hyperinflations (during the record Hungarian inflation of 1945-46, the quantity of currency in circulation grew to a number with 27 zeroes). Most importantly, zero (or slightly less) marks the lower bound on nominal interest rates and a downward barrier for wage changes...

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Is 2% still the solution?

The debate over the appropriate level for a central bank’s inflation objective reminds us of a 40-year-old Sherlock Holmes movie called “The Seven-Per-Cent Solution.” Convinced that Holmes’ addiction to cocaine (the solution in the title) had made him delusional, Watson took the master sleuth to Vienna to be treated by Sigmund Freud.

Has the 2% solution for inflation targeting in advanced economies made central bankers similarly delusional? Are they stubbornly attached to an outdated target? That argument gained ground in recent years as policymakers in Europe, Japan, and the United States struggled to stimulate weak economies and stabilize prices with policy interest rates stuck at the zero bound...

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