Question

“The zero lower bound on short-term interest rates is not a problem, since the central bank can just use quantitative easing to lower intermediate and longer-term interest rates instead.” Is this statement true, false, or uncertain? Explain.

Short answer

This statement is false.

Step-by-step solution

Concept Introduction

Zero-bound is an expansionary economic policy tool where a central bank decreases short-term interest rates to zero, if required, to boost the economy. A central bank that is forced to legislate this policy must also follow other, often unconventional, techniques of stimulus to resuscitate the economy.

Explanation

Quantitative easing is a policy operated by the central government to a regular local economy. It is one of the strategies operated once the zero lower bound is achieved on short-term interest rates. The central bank cannot reduce the interests rates to stabilize the economy as the interest rate cannot go descending than zero. This might conduct to the withdrawal of money from the centralized bank by account holders. Lending money from Government financial institutions at lower rates will enable the centralised bank to sustain and achieve lower interest rates.

Final Answer

This statement is false.