The paper reviews issues related to the zero lower bound (ZLB) on interest rates and argues that all of the following propositions are invalid: (i) in a ZLB situation, "shaping interest rate expectations is essentially the only tool that central bankers have"(Bernanke, et.al., 2004); (ii) fiscal policy actions such as "helicopter drops" are in theory more effective than monetary policy actions; (iii) the prominent "foolproof way" policy rule of Svensson (2001, 2003) is applicable more generally -i.e., even when exact uncovered interest parity holds- than the alternative exchange-rate rule of McCallum (2000); (iv) both of the exchange-rate strategies described in (iii) are open to the objection that they constitute "beggar-thy-neighbor" approaches, and (v) there is a significant danger of ZLB difficulties stemming from a "deflationary trap" type of equilibrium, as distinct from a "liquidity trap."
Keywords: Interest Rates; Zero Lower Bound; Quantitative Easing; Expectations; Deflation Trap; Liquidity Trap
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.