The Zero Interest Rate Floor (ZIF) and its Implications for Monetary Policy in Japan
IMF Working Papers, November 1, 2001
Source details
- Canonical URL
- The Zero Interest Rate Floor (ZIF) and its Implications for Monetary Policy in Japan
Other formats
Bibliographic details
- Authors: Douglas Laxton, Benjamin L Hunt
- Published: November 1, 2001
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451859461.001
Summary
- This paper uses the IMF's macroeconomic model MULTIMOD to examine the implications of the zero-interest-rate floor (ZIF) for the design of monetary policy in Japan.
- Targeting rates of inflation lower than 2.0 percent significantly increases the likelihood of the ZIF becoming binding.
- Systematic monetary policy strategies that respond strongly to stabilize output and inflation, or that incorporate some explicit price-level component, can help to mitigate the implications of the ZIF.
Key findings
- Targeting inflation rates lower than 2.0 percent materially raises the probability that the ZIF becomes binding.
- Strong systematic policy responses that stabilize output and inflation reduce the adverse implications of the ZIF.
- Incorporating an explicit price-level component into monetary policy strategies can help mitigate the ZIF's effects.
Policy implications and recommendations
- Consider monetary policy strategies that respond strongly to deviations in output and inflation to lower the risk of hitting the ZIF.
- Consider including an explicit price-level component in policy rules to better mitigate the ZIF's implications.
- Recognize that lower inflation targets (i.e., targets below 2.0 percent) make the ZIF binding more likely and adjust policy design accordingly.
Model and methods
- Analytical framework: IMF macroeconomic model MULTIMOD.
- Focus: implications of the zero-interest-rate floor (ZIF) for monetary policy design in Japan.
Content in this bundle
- The Zero Interest Floor