Zero-Bound Interest Rate

AAA

DEFINITION of 'Zero-Bound Interest Rate'

The lowest percentage of owed principal that a central bank can set. In monetary policy, the use of a 0% nominal interest rate means that the central bank can no longer reduce the interest rate to encourage economic growth. As the interest rate approaches the zero bound, the effectiveness of monetary policy is reduced as a macroeconomic tool. A zero-bound interest rate typically refers to the process where, by gradual steps, the interest rate approaches zero.

INVESTOPEDIA EXPLAINS 'Zero-Bound Interest Rate'

For much of the 1990s, the interest rate set by the Japanese central bank, the Bank of Japan, hovered near the zero bound. This was done in order to encourage inflation and reduce the threat of deflation, since banks typically increase interest rates to slow growth down. Zero-bound interest rate policies follow periods of major economic pullback.

RELATED TERMS
  1. Central Bank

    The entity responsible for overseeing the monetary system for ...
  2. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  3. Inflation

    The rate at which the general level of prices for goods and services ...
  4. Deflation

    A general decline in prices, often caused by a reduction in the ...
  5. Stagflation

    A condition of slow economic growth and relatively high unemployment ...
  6. Monetary Policy

    The actions of a central bank, currency board or other regulatory ...
RELATED FAQS
  1. How can a government balance the stimulating effects of increased spending with the ...

    In Keynesian macroeconomic theory, fiscal policy stimulus is most useful after liquidity constraints render monetary policy ... Read Full Answer >>
  2. When has the United States run its largest trade deficits?

    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>
  3. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  4. How does the bond market react to changes in the Federal Funds Rate?

    The bond market is highly sensitive to changes in the federal funds rate. When the Federal Reserve increases the federal ... Read Full Answer >>
  5. Which is more important to a nation's economy, the balance of trade or the balance ...

    There is no question the composition of a country's balance of payments is more important than its balance of trade. This ... Read Full Answer >>
  6. What are the ethical arguments against government subsidies to companies like Tesla?

    The ethical argument behind government subsidies is that they should be put into place to help industries that will, in turn, ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    Coping With Inflation Risk

    Inflation is less dramatic than a crash, but it can be more devastating to your portfolio.
  2. Economics

    Do Deflationary Shocks Help Or Hurt The Economy?

    Find out how deflationary shocks can both benefit and hurt consumers and businesses.
  3. Options & Futures

    The Consumer Price Index: A Friend To Investors

    As a measure of inflation, this index can help you make key financial decisions.
  4. Mutual Funds & ETFs

    The Upside Of Deflation

    Deflation has continued to pop up throughout economic history - but is that such a bad thing?
  5. Bonds & Fixed Income

    Can Keynesian Economics Reduce Boom-Bust Cycles?

    Learn about a British economist's proposed solution to a common economic problem.
  6. Economics

    What Is a Quota?

    In business, quota usually refers to the sales target for a salesperson or a sales team.
  7. Economics

    What Does Infrastructure Mean?

    Examples of infrastructure include mass transit, communication, sewage, water and electric systems, plus roads, bridges and tunnels.
  8. Economics

    Calculating the GDP Price Deflator

    The GDP price deflator adjusts gross domestic product by removing the effect of rising prices. It shows how much an economy’s GDP is really growing.
  9. Economics

    What's a Centrally Planned Economy?

    A centrally planned economy is one where the government controls the country’s supply and demand of goods and services.
  10. Economics

    What are Barriers to Entry?

    A barrier to entry is any obstacle that restricts or impedes a company’s efforts to enter an industry.

You May Also Like

Hot Definitions
  1. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  2. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  3. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  4. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  5. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  6. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!