25th March 2019
Low interest rates are supposed to stimulate economic activity. Very low interest rates are supposed to stimulate economic activity even more. This linear thinking, which dominates monetary policymaking, is now being questioned.
The concept of an Expansionary Lower Bound (ELB) to monetary policy, a minimum interest rate below which further rate reductions become counterproductive, is a persuasive idea. The experience of both Japan and Europe suggests the ELB may be generally applicable to both developed and emerging economies.