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Zero lower bound: is it a problem in the euro area?

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  • Coenen, Günter

Abstract

This paper presents the results of a quantitative study of the implications of the zero lower bound on nominal interest rates which was undertaken in the context of the review of the ECB's monetary policy strategy in Spring 2003. Focusing on the euro area, the paper provides an assessment of the likelihood that the short-term nominal interest rate may be constrained at zero and quantifies how the zero-bound constraint may affect the dynamic behaviour of key macroeconomic variables such as the short-term nominal interest rate, annual inflation and output JEL Classification: E31, E52, E58, E61

Suggested Citation

  • Coenen, Günter, 2003. "Zero lower bound: is it a problem in the euro area?," Working Paper Series 269, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2003269
    Note: 241047
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp269.pdf
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    References listed on IDEAS

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    1. Coenen, Guenter & Wieland, Volker, 2003. "The Zero-Interest-Rate and the Role of the Exchange Rate for Monetary Policy in Japan," CFS Working Paper Series 2003/09, Center for Financial Studies (CFS).
    2. Coenen, Gunter & Wieland, Volker, 2005. "A small estimated euro area model with rational expectations and nominal rigidities," European Economic Review, Elsevier, vol. 49(5), pages 1081-1104, July.
    3. Coenen Günter & Orphanides Athanasios & Wieland Volker, 2004. "Price Stability and Monetary Policy Effectiveness when Nominal Interest Rates are Bounded at Zero," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-25, February.
    4. Coenen, Gunter & Wieland, Volker, 2003. "The zero-interest-rate bound and the role of the exchange rate for monetary policy in Japan," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1071-1101, July.
    5. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    6. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270.
    7. David L. Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
    8. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    9. Coenen, Gunter, 2007. "Inflation persistence and robust monetary policy design," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 111-140, January.
    10. Smets, Frank & Wouters, Raf, 2002. "An estimated stochastic dynamic general equilibrium model of the euro area," Working Paper Series 171, European Central Bank.
    11. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Paul Grauwe & Yuemei Ji, 2018. "Behavioural Economics is Useful Also in Macroeconomics: The Role of Animal Spirits," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 60(2), pages 203-216, June.
    2. Hess Chung & Jean‐Philippe Laforte & David Reifschneider & John C. Williams, 2012. "Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(s1), pages 47-82, February.
    3. Camba-Méndez, Gonzalo & Garcí­a, Juan Angel & Rodriguez-Palenzuela, Diego, 2003. "Relevant economic issues concerning the optimal rate of inflation," Working Paper Series 278, European Central Bank.
    4. Günter Coenen & Carlos Montes‐Galdón & Frank Smets, 2023. "Effects of State‐Dependent Forward Guidance, Large‐Scale Asset Purchases, and Fiscal Stimulus in a Low‐Interest‐Rate Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(4), pages 825-858, June.
    5. Matthieu Darracq Paries, 2018. "Financial frictions and monetary policy conduct," Erudite Ph.D Dissertations, Erudite, number ph18-01 edited by Ferhat Mihoubi.
    6. Adjemian, Stéphane & Darracq Pariès, Matthieu & Moyen, Stéphane, 2007. "Optimal monetary policy in an estimated DSGE for the euro area," Working Paper Series 803, European Central Bank.
    7. repec:got:cegedp:27 is not listed on IDEAS
    8. Philippe Andrade & Jordi Gali & Hervé Le Bihan & Julien Matheron, 2021. "Should the ECB Adjust Its Strategy in the Face of a Lower r*?," Working Papers 22-1, Federal Reserve Bank of Boston.
    9. Paul De Grauwe & Yuemei Ji, 2019. "Inflation Targets and the Zero Lower Bound in a Behavioural Macroeconomic Model," Economica, London School of Economics and Political Science, vol. 86(342), pages 262-299, April.
    10. Philippe Andrade & Jordi Gali & Herve Le Bihan & Julien Matheron, 2019. "The Optimal Inflation Target and the Natural Rate of Interest," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 50(2 (Fall)), pages 173-255.
    11. Franta, Michal, 2021. "The Likelihood Of Effective Lower Bound Events," Macroeconomic Dynamics, Cambridge University Press, vol. 25(8), pages 2058-2079, December.
    12. Peter Bofinger & Eric Mayer, 2007. "Monetary and Fiscal Policy Interaction in the Euro Area with Different Assumptions on the Phillips Curve," Open Economies Review, Springer, vol. 18(3), pages 291-305, July.
    13. John C. Williams, 2009. "Heeding Daedalus: Optimal Inflation and the Zero Lower Bound," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 1-49.
    14. Stefan Gerlach & John Lewis, 2014. "ECB Reaction Functions and the Crisis of 2008," International Journal of Central Banking, International Journal of Central Banking, vol. 10(1), pages 137-158, March.
    15. Kevin Clinton & Roberto Garcia-Saltos & Marianne Johnson & Ondrej Kamenik & Douglas Laxton, 2010. "International Deflation Risks under Alternative Macroeconomic Policies," NBER Chapters, in: Sticky Prices and Inflation Dynamics (NBER-TCER-CEPR), pages 140-177, National Bureau of Economic Research, Inc.
    16. Andrade, Philippe & Galí, Jordi & Le Bihan, Hervé & Matheron, Julien, 2021. "Should the ECB adjust its strategy in the face of a lower r★?," Journal of Economic Dynamics and Control, Elsevier, vol. 132(C).
    17. Coenen, Günter & Montes-Galdón, Carlos & Schmidt, Sebastian, 2021. "Macroeconomic stabilisation and monetary policy effectiveness in a low-interest-rate environment," Journal of Economic Dynamics and Control, Elsevier, vol. 132(C).
    18. repec:zbw:bofrdp:2021_005 is not listed on IDEAS
    19. Coenen, Günter, 2003. "Downward nominal wage rigidity and the long-run Philips Curve: simulation-based evidence for the euro area," Working Paper Series 270, European Central Bank.
    20. Christian Bordes & Laurent Clerc, 2007. "Price Stability And The Ecb'S Monetary Policy Strategy," Journal of Economic Surveys, Wiley Blackwell, vol. 21(2), pages 268-326, April.
    21. Stefaan Ide & Jef Boeckx & David Cornille, 2009. "Deflation, a demon from the distant past or a real danger now ?," Economic Review, National Bank of Belgium, issue iii, pages 7-31, September.
    22. repec:bla:perwir:v:5:y:2004:i:4:p:381-404 is not listed on IDEAS
    23. Haavio, Markus & Laine, Olli-Matti, 2021. "Monetary policy rules and the effective lower bound in the Euro area," Bank of Finland Research Discussion Papers 5/2021, Bank of Finland.
    24. Haavio, Markus & Laine, Olli-Matti, 2021. "Monetary policy rules and the effective lower bound in the Euro area," Research Discussion Papers 5/2021, Bank of Finland.
    25. Bofinger, Peter & Schnabel, Isabel & Feld, Lars P. & Schmidt, Christoph M. & Wieland, Volker, 2014. "Mehr Vertrauen in Marktprozesse. Jahresgutachten 2014/15 [More confidence in market processes. Annual Report 2014/15]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201415, February.

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    More about this item

    Keywords

    euro area; interest rate rules; nominal rigidities; price stability; zero-interest-rate bound;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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