Journal of Money, Credit, and Banking 42 (2010) Supplement 229-242
First version: June 2009
This version: June 2010
I discuss what determines the effective lower bound (ELB) for the policy rate and argue argue that the ELB is not hard, but rather soft, and that it is probably slightly negative. I argue that, at the ELB, current output can be increased by (1) monetary policy that extends the period of credibly low policy rates and generates inflation expectations, (2) financial-stability policy - which is distinct from monetary policy - that reduces the spreads between market interest rates and the policy rate, and (3) fiscal policy that increases the neutral real rate by reducing expected growth of government expenditure and increases potential output by increasing current government expenditure.
JEL Classification: E52, E58, E43
Keywords: Zero lower bound