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Joshua R Hendrickson
''There is no such thing as the zero lower bound''
( 2019, Vol. 39 No.3 )
Conventional discussion of the zero lower bound on nominal interest rates relies on static reasoning. According to the conventional argument, people who are holding interest-bearing assets should switch to currency the instant that the nominal interest rate falls below zero since currency has a fixed nominal rate of interest equal to zero. In this paper, I argue that the presence of uncertainty about the expected future path of the nominal interest rate and the non-negative fixed costs associated with the storage of cash require a dynamic rather than a static analysis. People who are holding an interest-bearing asset have the option, but not the obligation to switch to currency at any point in time. The economic decision is to determine at what point to exercise this option. I show that the lower bound on the nominal interest rate in this context is below zero. This is true even if storage costs are approximately zero. Since my calculation does not depend on storage costs, it implies that the effective lower bound on the nominal interest rate might be considerably lower than previously thought.
Keywords: zero lower bound, monetary policy
JEL: E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General
E4 - Money and Interest Rates: General
Manuscript Received : Jul 10 2019 Manuscript Accepted : Aug 20 2019

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