ZERO LEVEL OF INTEREST RATES AS THE CONSTRAINT OF CENTRAL BANK'S POLICY
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The effect of a zero bound in nominal interest rates is one of the challenges that low inflation poses for monetary policy. The central bank is unable to enforce the lowering of the real interest rates, which is necessary if a country is to combat recession, when the nominal interest rates are already very low. The simplest method to avoid the problems caused by the existence of zero bound on nominal interest rates is the maintenance of low inflation rate (2 to 3 %) and its stabilization in the vicinity of inflation target. The central bank should take good care to ensure that the monetary policy guarantees continuation and transparency. In case the zero bound effect takes place, the central bank can resort to apply a wide variety of non-standard instruments. Efficacy of these instruments depends strongly on recession causes and on the specificity of a given economy. It may turn out that negative effects of certain instruments might overshadow the expected benefits.
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