ZLB problem

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The Zero Lower Bound problem.

The ZLB problem arises in relation to government policy to stimulate or otherwise influence economic activity by influencing interest rates.

When interest rates are already very low, close to zero, inflation is very low, and growth is unstable, it becomes very difficult to reduce interest rates any further.

This is because - among other undesirable effects - negative interest rates would encourage the hoarding of physical cash.

This is one reason why central authorities such as the UK government set inflation targets at a positive level - albeit a low level - rather than zero.

See also