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The Zero Lower Bound and the Asymmetric Efficacy of Monetary Policy: A View from the History of Economic Ideas

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  • Giancarlo Bertocco

    (Università degli Studi dell’Insubria)

  • Andrea Kalajzić

    (Università degli Studi dell’Insubria)

Abstract

The monetary authorities of advanced economies have used the Wicksellian distinction between the natural rate of interest, also called the equilibrium real rate of interest, and the rate of interest on money to explain the partial ineffectiveness of the measures taken to deal with the Great Recession. They have explained that the instrument of the rate of interest on money produces asymmetric effects. Indeed, to fight high inflation central banks can increase the level of the rate of interest on money without limits. However, if they had to fight deflation they could not lower the rate of interest on money below zero. The presence of a negative value of the natural rate of interest has been indicated by the monetary authorities to justify the limited effectiveness of monetary policy during the Great Recession. The aim of this work is to show that the Wicksellian concept of natural rate of interest cannot be used to explain the functioning of contemporary economies. The limits of this concept will be specified by using the arguments developed by Keynes and Schumpeter to emphasize the exclusively monetary nature of the rate of interest.

Suggested Citation

  • Giancarlo Bertocco & Andrea Kalajzić, 2018. "The Zero Lower Bound and the Asymmetric Efficacy of Monetary Policy: A View from the History of Economic Ideas," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 4(3), pages 549-566, November.
    • Handle: RePEc:spr:italej:v:4:y:2018:i:3:d:10.1007_s40797-018-0073-7
    DOI: 10.1007/s40797-018-0073-7
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    Cited by:

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    2. Marco Missaglia & Patricia Sanchez, 2020. "Liquidity preference in a world of endogenous money: A short-note," Revista Cuadernos de Economia, Universidad Nacional de Colombia, FCE, CID, vol. 39(81), pages 595-612, July.
    3. Marco Missaglia & Alberto Botta, 2024. "Households’ Liquidity Preference, Banks’ Capitalization and the Macroeconomy: A Theoretical Investigation," Review of Political Economy, Taylor & Francis Journals, vol. 36(3), pages 1192-1215, July.
    4. Di Bucchianico, Stefano, 2020. "Discussing Secular Stagnation: A case for freeing good ideas from theoretical constraints?," Structural Change and Economic Dynamics, Elsevier, vol. 55(C), pages 288-297.
    5. Marco Missaglia & Alberto Botta, 2020. "The role of liquidity preference in a framework of endogenous money," Working Papers PKWP2015, Post Keynesian Economics Society (PKES).
    6. Stefano Di Bucchianico, 2021. "Negative Interest Rate Policy to Fight Secular Stagnation: Unfeasible, Ineffective, Irrelevant, or Inadequate?," Review of Political Economy, Taylor & Francis Journals, vol. 33(4), pages 687-710, October.
    7. Di Bucchianico, Stefano, 2021. "Inequality, household debt, ageing and bubbles: A model of demand-side Secular Stagnation," IPE Working Papers 160/2021, Berlin School of Economics and Law, Institute for International Political Economy (IPE).

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    More about this item

    Keywords

    Natural rate of interest; Bank money; Wicksell; Keynes; Schumpeter;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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