The liquidity effect and tightening effect of the zero lower bound

抄録

The tightening effect of the zero lower bound on the nominal interest rate is a non-trivial topic in monetary policy: at the zero lower bound, responding to a rise in money growth by reducing the nominal interest rate—what is called the liquidity effect—is not possible because the nominal interest rate cannot be further decreased. However, the absence of the liquidity effect caused by the zero lower bound might amplify the tightening effect of the zero lower bound. I call this tightening effect of the zero lower bound through its liquidity effect on the economy the rebound of liquidity effect, and demonstrate it quantitatively with a simple dynamic stochastic general equilibrium framework.