8 Pages Posted: 24 Jan 2013
Date Written: February 2013
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: 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
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