Question

Discuss the challenges which the zero lower bound poses for monetary policy

Answer 1

The Zero Lower Bound is basically is a  a macroeconomic issue that arise  when the nominal interest rate in the short term falls at or near zero, causing a liquidity trap and restrains the ability of  the central bank to fuel economic growth.

The Zero Lower Bound on interest rates is referred as one of the significant  obstacle  on monetary policy. The challenges that an environment of near zero interest rate can face for monetary policy is that it cannot  be implemented in the usual way and  inability to lower interest rates can give rise to  a unexpected  and hasty  fall in the demand for goods and services to drive  the economy into a deflationary spiral,a state  in which declining  prices and declining  output nurse  upon each other. The panic  is that a negative demand shock that is pushing  down prices in short deflationary shock can advance  further decrease in the output thereby stressing  the deflationary process. This additional deflation will further  lead to additional  output decline.. some economists have referred downward spiral as a black hole from where there is no return back.