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Class Year

2016

Abstract

The twenty-first century has thus far posed some of the most difficult economic challenges for policy makers that the world has ever seen. The most recent recession, the Global Financial Crisis of 2007-8, is considered the worst economic downturn in recent history. In light of unique challenges such as the recession, central banks around the world are coming up with new tools or new ways of thinking about tools in order to mediate financial crises. This paper investigates the possibility of eliminating the zero lower bound on nominal interest rates to stimulate the economy in reaction to severe financial crises. To substantiate my claim for negative interest rates in times of crises, I challenge the conventional theory regarding the fear of negative interest rates, examine the success of other countries that have employed negative interest rates in order to stimulate economic growth, and provide one example of how potential negative outcomes can be avoided. This paper makes the case that while more research on negative interest rates is to be done, they are a valid option for an economy in crisis and could be used in another circumstance similar to the recession that the U.S. economy faced in 2008-9.

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