Zero Lower Bound & Negative Interest Rates: Choices for Monetary Policy

Abstract

In this treatise, we have endeavoured to analyse the implications of real interest rates for the British economy by using a Time Varying Structural Vector Auto-regressive (TVSVAR) Model. Employing the data on real GDP growth, unemployment, inflation and real rates from January 1989 to September 2016 in a framework where the sources of time variation were both the coefficients and variance-covariance matrix of the innovations, we found that the real rates have significant implication for the real growth, labour market and inflation even when in the nominal sense the monetary policy is constraint at the Zero-Lower-Bound (ZLB). We also consider the strategy of allowing a discrete break in the data and completely focusing the Post-Global Financial Crisis and ZLB epoch. It showed that the real rates effectiveness did not diminish which has important implications in terms of policy setting and allowing for the other measures despite pushing on negative rates.