The economics of negative interest rates: editors’ introduction

Thomas Palley, Louis-Philippe Rochon, Guillaume Vallet , Review of Keynesian Economics, April 2019.

The Great Recession (2008/9) triggered by the financial crisis of 2008 has had considerable impact on the conduct of monetary policy. Before the recession, monetary policy was largely based on a New Consensus-type macroeconomic model and it targeted inflation via a Taylor interest rate rule. The belief was that policy engineered changes in real interest rates had strong and predictable effects on output and inflation.

Based on that understanding, in the immediate wake of the financial crisis, central banks were quick to lower their policy interest rate to zero or near-zero. The expectation was for a speedy and robust V-shaped recovery, an expectation which was reflected in Federal Reserve Chairman Ben Bernanke’s comments in March 2009 about seeing “green shoots” of economic recovery.

When that V-shaped recovery failed to materialize, expectations shifted to a U-shaped recovery, and then in turn morphed into L-shaped recovery and talk of secular stagnation. READ MORE

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