The Limits of a Negative Interest Rate Policy (NIRP)

The paper analyzes the experience with unconventional measures to cope with the Zero Lower Bound. It argues that forward guidance and quantitative easing are the natural extension of optimal monetary policy within the New Keynesian Framework, facing a Lower Bound. Unconventional policy had significant effects on financial variables and contributed to stabilizing the real economy. Negative rates have been successful in pushing the effective lower bound below zero. But given the risk of damaging side effects on financial stability and on central bank independence, these policy tools are likely to be less powerful and shorter-lived compared to standard tools. In view of the long-term decline of the natural rate of interest, raising the inflation target up to 3–4 percent appears to be the most promising way to relax the constraint imposed by the lower bound, providing a resilient buffer for effective stabilization.