Zero lower bound

The zero lower bound (ZLB) or zero nominal lower bound (ZNLB) is a macroeconomic problem that occurs when the short-term nominal interest rate is at or near zero, causing a liquidity trap and limiting the central bank's capacity for inflation targeting.

The root cause of the ZLB is the issuance of paper currency by central banks, effectively guaranteeing a zero nominal interest rate and acting as an interest rate floor. Central banks cannot encourage spending by lowering interest rates, because people would simply hold cash instead. However, several central banks were able to reduce interest rates below zero; for example, the Czech National Bank estimates that the lower limit on its interest rate is below −1%.^[1]

The problem of the ZLB returned to prominence with Japan's experience during the 1990s, and more recently with the subprime crisis. The belief that monetary policy under the ZLB was effective in promoting economy growth has been critiqued by Paul Krugman, Gauti Eggertsson, and Michael Woodford among others.