By Roosevelt Institute |

dictionary-150What is ZIRP?

ZIRP stands for Zero Interest Rate Policy, a method of stimulating economic growth by keeping interest rates close to zero. Under this policy, a central bank — in the case of the US, the Federal Reserve — maintains a 0% nominal interest rate. The US has been following this policy since the end of 2008. Japan is perhaps the most salient example, as its government followed this policy for a very long time.

What’s the significance?

Once a country follows a ZIRP policy, the central bank can no longer reduce interest rates, one of its main tools for stimulating borrowing. Many economists feel that at this point monetary policy becomes ineffective. Some also worry that it isn’t enough on its own and that fiscal policy, in the form of government spending on stimulus, is necessary. The policy also benefits banks by making borrowing from the Fed cheap, but harms savers by lowering their interest rates.

Who’s talking about it?

Marshall Auerback points out that recent economic growth is not in fact due to ZIRP or QE2 as some believe… Mike Konczal and Arjun Jayadev did research showing that changing interest rates helped some economies out of recessions, but isn’t a choice for the US currently… Joe Costello warns that ZIRP and QE undermine the value of money and are creating another bubble… Paul Krugman has repeatedly warned against adopting a ZIRP policy… Christopher Whalen points out the ways in which the Fed’s ZIRP policy has failed, particularly for Main Street.

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