Unwinding ZIRP: A simulation analysis

Abstract

This paper sets up a zero interest rate policy (ZIRP) experiment, using a two-market agent-based simulation model, in order to analyze the price dynamics of a large and small stock market during the unwinding of a simulated ZIRP. Different unwinding paths are created to determine which path has the most stabilizing impact on both the large and small stock market. Results indicate, that increasing the interest rate every three months create significant financial crises and negative stock market returns. However, increasing the rate every year leads to only modest declines in the large and small stock market. Moreover, the size of the interest rate change plays a much smaller role then the frequency of the rate changes. Rate increases every quarter creates 20% market corrections in the large market during the unwinding phase, as opposed to 4% downside when rate changes occur once a year.