Dangers of low interest rates: case study Japan
A lot of pro-fiscal stimulus arguments in the US and the UK come from the classical zero lower bound (ZLB) assumption, in which monetary policy is said to be ineffective when interest rates hit zero (the lower boundary). This means that the central bank is basically ineffective in its further monetary operations to kick-start the economy, since it cannot lower rates to negative levels (this is not to be confused with real negative interest rates paid on, for example, German bonds). So in this situation of the zero lower bound trap (or as Keynes called it the Liquidity trap), the only favourable option is to kick-start recovery via fiscal stimulus. In particular, the fiscal stimulus would include more spending on infrastructure projects and direct packages of support to certain business projects (like the green economy). (Disregard at the moment monetary stimulus arguments I’ve covered in three previous texts – here , here and here ; ideas such as NGDP targeti...