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. Inflation

    The rate at which the general level of prices for goods and services ...
  3. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  4. Monetary Policy

    The actions of a central bank, currency board or other regulatory ...
  5. Deflation

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

    A condition of slow economic growth and relatively high unemployment ...
Related Articles
  1. Do Deflationary Shocks Help Or Hurt ...
    Economics

    Do Deflationary Shocks Help Or Hurt ...

  2. The Consumer Price Index: A Friend To ...
    Options & Futures

    The Consumer Price Index: A Friend To ...

  3. The Upside Of Deflation
    Mutual Funds & ETFs

    The Upside Of Deflation

  4. Can Keynesian Economics Reduce Boom-Bust ...
    Bonds & Fixed Income

    Can Keynesian Economics Reduce Boom-Bust ...

comments powered by Disqus
Hot Definitions
  1. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  2. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  3. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  6. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
Trading Center