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Strategies & Market Trends : Booms, Busts, and Recoveries
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To: elmatador who wrote (25302)11/11/2002 9:15:06 AM
From: Moominoid   of 74559
 
What about the zero nominal interest-rate floor, the point at which central banks supposedly become impotent? Listening to officials from the Bank of Japan, you would think that once they set their interest rate target to zero, there was nothing else they could do about stagnant growth and falling prices. Again, I do not believe it. We all know that whatever a central bank does, it does it by adjusting its balance sheet - buying and selling securities and making loans to commercial banks. And, uniquely, the central bank can expand its balance sheet without limit. None of this changes when the nominal interest rate hits zero. Monetary policymakers can still buy securities, enlarging their balance sheet, increasing the amount of money in the economy and eventually driving prices up. These "unorthodox" methods are not all that mysterious. Federal Reserve policymakers know how they work and will use them decisively if and when the time comes.

I must be dumb :) Or this guy has got it wrong. If the price of money is zero it means no-one wants any more however much the Fed tries to pump into the system. It doesn't matter if they set an interest rate and then lend as much as anyone wants at that interest rate or use open market trading in bonds to set the money supply and interest rate.

David
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