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The ZIRP Trap - why low interest rates are a tax on recovery

WP 2015-02

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The ZIRP Trap - why low interest rates are a tax on recovery

by • Philipp Bagus

Western central banks have been pursuing unconventional monetary since at least 2008. Is there a way of ending them?
The authors identify the winners and losers of these policies, compared a world without them. How much are the relevant parties better/worse off?

The policies harm recovery by subsidizing a distorted structure of production and encouraging overindebtedness, new bubbles and unintended consequences that destabilize the financial system. They also discourage entrepreneurship,hard work and prudent investment. They complicate long-term planning, politicize society and erode the foundations of capitalism.

What is, if any, is the way out? And how costly is it going to be - and for whom?

The authors analyze the exit options that remain for policy makers, including
• financial repression,
• high inflation,
• default,
• capital levies,
• bail-ins,
• currency reforms, etc.

These exit options are evaluated in turn.

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