Zero Interest Rate Policy Commitments

ABSTRACT

In the midst of declining short-term interest rates, the financial policy most effective for lowering long-term interest rates would be to lower consumers' expected value regarding short-term interest rates in the future. A policy such as this could be called monetary relaxation through the "channel of expectation", and is one effective method to ease the money market while maintaining a zero interest rate. In order to realize this, the central bank must announce to the market in a credible way that, "Zero interest rate policies will be continued for a short while, even after the inflation rate reaches zero". In contrast, in April 1999 the Bank of Japan made a commitment stating, "Until the casting-aside of deflationary concerns is in sight, zero interest rate policies will be continued". This statement did not effectively utilize the "channel of expectation" for monetary relaxation and thus was inadequate. It is also possible that economic recovery has been delayed as a result of the insufficient relaxation of the money market. A further sticking point in this commitment is that it does not align with the proper course to be followed after the cancellation of the zero interest rate policies.