Breaking the Zero Bound: How Slight Rate Increases Boost Output
The study looks at how interest rates affect the economy when they can't go below a certain level. By combining a non-zero lower bound lending rate with the usual zero bound policy rate, the researchers found that slightly raising the benchmark rate can boost output once the lower limit is reached. Increasing the zero bound rate is better for increasing inflation than quantitative easing, but tightening too much in a normal situation can have the opposite effect.