Economic Policy When the Short-Term Nominal Interest Rate is Stuck at the Lower Bound of Zero


This paper is a revised version of comments presented at the October 1999 Federal
Reserve System conference on ” Monetary Policy in a Low-Inflation Environment.” The
comments focus on a paper by Marvin Goodfriend entitled “Overcoming the Zero Bound on
Interest Rate Policy.” Goodfriend’s paper and these comments ask whether the zero lower
bound on nominal interest rates—the short-term nominal interest rate falling to zero and then getting stuck there for a temporary but perhaps lengthy period (for shorthand reference, a “liquidity trap”)—is a significant problem that requires rethinking the conduct of monetary policy. Both Goodfriend and I believe the liquidity-trap dilemma can be significant, as in Japan in the recent past. These comments assess the analysis that lies behind Goodfriend’s policy recommendations and then conclude with my own views about how macroeconomic policies should deal with a liquidity trap and brief observations about the Japanese economic and financial situation in 1998-99.