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Zombification is a real, not a monetary phenomenon: Exorcising the bogeyman of low interest rates

Ulrich Bindseil, Jürgen Schaaf, (2020), «Zombification is a real, not a monetary phenomenon: Exorcising the bogeyman of low interest rates» , VoxEU, 10 Ιανουαρίου

Low nominal interest rates have worried central bank critics for different reasons over the last decade. First, calls for pre-emptive interest rate increases were motivated by fears of a return of excessive inflation. Then, they were said to fuel financial bubbles, and therefore to eventually lead to a collapse of financial markets. Now, a new accusation against the ECB is gaining ground: the ECB’s low interest rates keep ‘zombie’ businesses alive artificially, thereby obstructing structural change, weakening economic growth, which eventually leads to a vicious circle of low growth and low interest rates. We argue that this accusation is theoretically and empirically doubtful – and leads to harmful policy recommendations.

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