Zero Interest Rates in the United States Provoke World Monetary Instability and Constrict the US Economy

8 Pages Posted: 24 Jan 2013  

Ronald McKinnon

Stanford University, School of Humanities & Sciences, Department of Economics (Deceased); CESifo (Center for Economic Studies and Ifo Institute for Economic Research) (Deceased)

Zhao Liu

affiliation not provided to SSRN

Date Written: February 2013

Abstract

Under near zero US interest rates, the international dollar standard malfunctions. Emerging markets (EM) with naturally higher interest rates are swamped with hot money inflows. EM central banks intervene to prevent their currencies from rising precipitately. They lose monetary control and begin inflating. Primary commodity prices rise worldwide unless interrupted by an international banking crisis. This inflation on the dollar's periphery only registers in the US core consumer price index (CPI) with a long lag. The zero interest rate policy also fails to stimulate the US economy as domestic financial intermediation by banks and money market mutual funds is undermined.

Suggested Citation

McKinnon, Ronald and Liu, Zhao, Zero Interest Rates in the United States Provoke World Monetary Instability and Constrict the US Economy (February 2013). Review of International Economics, Vol. 21, Issue 1, pp. 49-56, 2013. Available at SSRN: https://ssrn.com/abstract=2206161 or http://dx.doi.org/10.1111/roie.12019

Ronald McKinnon (Contact Author)

Stanford University, School of Humanities & Sciences, Department of Economics (Deceased)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) (Deceased)

Zhao Liu

affiliation not provided to SSRN

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