The Zero Lower Bound and the Asymmetric Efficacy of Monetary Policy: A View from the History of Economic Ideas

The monetary authorities of advanced economies have used the Wicksellian distinction between the natural rate of interest, also called the equilibrium real rate of interest, and the rate of interest on money to explain the partial ineffectiveness of the measures taken to deal with the Great Recession. They have explained that the instrument of the rate of interest on money produces asymmetric effects. Indeed, to fight high inflation central banks can increase the level of the rate of interest on money without limits. However, if they had to fight deflation they could not lower the rate of interest on money below zero. The presence of a negative value of the natural rate of interest has been indicated by the monetary authorities to justify the limited effectiveness of monetary policy during the Great Recession. The aim of this work is to show that the Wicksellian concept of natural rate of interest cannot be used to explain the functioning of contemporary economies. The limits of this concept will be specified by using the arguments developed by Keynes and Schumpeter to emphasize the exclusively monetary nature of the rate of interest.