TOPIC 3 ESSAY QUESTION
Candidate Number: FSQL9
Word Count: 1,094
University College London
ECON0038: The Economics of Money & Banking
, Introduction:
The Zero Lower Bound (ZLB) refers to the point at which nominal interest rates in the
economy are at or near zero (Kumhof and Wang, 2020). At this point, the spread between the
central bank policy rate and deposit rate are so low that financial institutions prefer saving
their excess reserves at the central bank rather than lending it in financial markets, leading to
constrained credit supplies, commonly referred to as a “liquidity trap” (Kumhof and Wang,
2020).
In modern economic history, the ZLB became a policy challenge during the Great Depression
of the 1930s (Kumhof and Wang, 2020). Later, it reemerged as a challenge in Japan’s
prolonged economic stagnation, sometimes referred to as the “Lost Decade”. Due to this, in
this essay I will be considering the challenges faced by central banks at the ZLB and
assessing the effectiveness of traditional and unconventional monetary policy to spur
economic growth at the ZLB for Japan.
Background:
Japan’s battle with the ZLB constraint begun following the bursting of the 1991 real estate
and stock bubble (Kowalewski and Shirai, 2023). This delivered a large negative shock to the
Japanese economy, leading to negative accelerator effects and economic stagnation (Ueda,
2012); between 1991-1993, GDP growth fell from approximately 3.5% to -0.5% (Figure 1).
The Bank of Japan (BoJ) lowered the discount rate from 6% to 0.5% between 1991-1996
(Figure 2) in response to persistently low inflation and stagnant economic growth.
1
Candidate Number: FSQL9
Word Count: 1,094
University College London
ECON0038: The Economics of Money & Banking
, Introduction:
The Zero Lower Bound (ZLB) refers to the point at which nominal interest rates in the
economy are at or near zero (Kumhof and Wang, 2020). At this point, the spread between the
central bank policy rate and deposit rate are so low that financial institutions prefer saving
their excess reserves at the central bank rather than lending it in financial markets, leading to
constrained credit supplies, commonly referred to as a “liquidity trap” (Kumhof and Wang,
2020).
In modern economic history, the ZLB became a policy challenge during the Great Depression
of the 1930s (Kumhof and Wang, 2020). Later, it reemerged as a challenge in Japan’s
prolonged economic stagnation, sometimes referred to as the “Lost Decade”. Due to this, in
this essay I will be considering the challenges faced by central banks at the ZLB and
assessing the effectiveness of traditional and unconventional monetary policy to spur
economic growth at the ZLB for Japan.
Background:
Japan’s battle with the ZLB constraint begun following the bursting of the 1991 real estate
and stock bubble (Kowalewski and Shirai, 2023). This delivered a large negative shock to the
Japanese economy, leading to negative accelerator effects and economic stagnation (Ueda,
2012); between 1991-1993, GDP growth fell from approximately 3.5% to -0.5% (Figure 1).
The Bank of Japan (BoJ) lowered the discount rate from 6% to 0.5% between 1991-1996
(Figure 2) in response to persistently low inflation and stagnant economic growth.
1
