The Zero Interest Rate Policy and Quantitative Easing

Abstract

This chapter evaluates the zero interest rate policy and quantitative easing. Short-term interest rates in Japan had already reached close to zero percent by the mid-1990s, but a zero interest rate policy in the literal sense, coupled with a form of forward guidance, was embraced by the Bank of Japan in February of 1999. In retrospect, this was the start of the unconventional monetary policy that has been ongoing in Japan ever since and subsequently was adopted by many central banks in developed economies. The next year, amid a heated debate, the zero interest rate policy was terminated, but against the backdrop of a global economic downturn following the bursting of the dot-com bubble, the bank decided to move back to zero and adopt so-called quantitative easing. Meanwhile, the global economy emerged from its slump to resume what was dubbed the Great Moderation period of extended growth with relatively little financial volatility from 1982 to 2007. In an environment of improving global growth, the bank ended its quantitative easing program in March of 2006 and then raised interest rates in July of that year.