Monetary Policy after the Great Recession: The Role of Interest Rates

Walter Bagehot's observation that "John Bull can stand many things, but he cannot stand two percent" has been proven true in the aftermath of the Great Recession, as economic recovery has been disappointingly weak despite low interest rates. This book challenges the standard understanding of the monetary transmission mechanism and argues that low interest rates may have unintended consequences, such as risk-taking, high debt levels, and zombification of the economy. The author provides a comprehensive analysis of the issues related to interest rates in monetary policy, including the risk-taking channel, portfolio-balance channel, wealth effect, zombie firms, misallocation of resources, and neutral interest rate targeting. The book is written in an accessible and engaging manner and will be valuable for scholars of monetary economics and readers interested in (unconventional) monetary policy.

Format: Paperback / softback
Length: 248 pages
Publication date: 30 May 2022
Publisher: Taylor & Francis Ltd

Walter Bagehot once observed that "John Bull can stand many things, but he cannot stand two percent." Well, for several years, he has had to endure interest rates well below that, in some countries even below zero. Despite this sacrifice, the economic recovery from the Great Recession has been disappointingly weak. This book aims to answer this question.

The central thesis of the book is that the standard understanding of the monetary transmission mechanism is flawed. That understanding adopts erroneous assumptions, such as that low interest rates always stimulate economic growth by boosting the credit supply, investment, and consumption, and does not fully take into account several unintended channels of monetary policy, such as risk-taking, a high level of debt, or zombification of the economy. In other words, the effectiveness of monetary policy is limited during economic downturns accompanied by the debt overhang and the balance sheet recession, and generates negative effects, which can make the policy counterproductive.

The author provides a thorough analysis of the issues related to the interest rates in the conduct of monetary policy, such as the risk-taking channel of monetary policy, the portfolio-balance channel and the wealth effect, zombie firms in the economy, the misallocation of resources, as well as the neutral interest rate targeting and the difference between the neutral and natural interest rate and the negative interest rate policy.

The book is written in an accessible and engaging manner and will be a valuable resource for scholars of monetary economics as well as readers interested in (unconventional) monetary policy.

Dimension: 234 x 156 (mm)
ISBN-13: 9780367621889