Prague Economic Papers 2014, 23(3):315-329 | DOI: 10.18267/j.pep.486

Interest Rates Close to Zero, Post-crisis Restructuring and Natural Interest Rate

Piotr Ciżkowicz1, Andrzej Rzońca2
1 Warsaw School of Economics (pcizko@sgh.waw.pl).
2 Monetary Policy Council in the National Bank of Poland, Warsaw School of Economics (andrzej.rzonca@nbp.pl).

Central banks do not seem to account for the impact of interest rates close to zero on the natural interest rate after the bursting of the asset bubble that triggered the financial crisis in 2008. We claim that this omission may have harmful consequences. Should interest rates close to zero persistently decrease natural interest rates that would mean a fall in TFP growth and more limited central bank's capacity to influence aggregated demand and price dynamics. We explain that interest rates close to zero may persistently reduce the natural interest rate because in the economy, requiring post-crisis restructuring, they impede the process of restructuring and facilitate forbearance lending, which crowds viable economic agents out of credit through a number of channels. To reduce these risks, the central bank could voluntarily set a lower bound for interest rates cuts at, for instance, 2%. The boundary appropriate for a given economy should be a function of its growth rate and interest rates in the pre-crisis period. We argue that irrespectively of the central bank's credibility such a change in the monetary policy conducting in economies requiring post-crisis restructuring would bring better outcomes than keeping interest rates close to zero.

Keywords: restructuring, credit, interest rates close to zero, new Keynesian analytical framework
JEL classification: E51, E58, G34

Published: January 1, 2014  Show citation

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Ciżkowicz, P., & Rzońca, A. (2014). Interest Rates Close to Zero, Post-crisis Restructuring and Natural Interest Rate. Prague Economic Papers, 23(3), 315-329. doi: 10.18267/j.pep.486
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