This article has been translated from English to Gen Z Slang.

Zero lower bound (“ZLB”) is when short-term interest rates are chilling at zero 🚫, causing a liquidity trap and tying the central bank's hands in pumping up that economic growth juice.

Basically, it’s when rates hit rock bottom at 0%, and they aren't going anywhere lower. 🤷‍♀️

The go-to move in monetary policy is all about those interest rates, handled by the big boss, the central bank (“CB”).

If inflation is low-key or economic growth decides to ghost us, the central bank will slash those rates to hype up demand, hoping this will juice up the economy. 📈💸

But if the central bank keeps slashing rates, eventually, they’ll hit zero, like nada, zilch, and they can't drop any more. 😬

That's what we call the zero lower bound rate (“ZLB”).

By then, rates have dropped as low key as they can go.

Technically, you can dip below zero too. 🤔

The central bank could flex and dip rates into negative territory.

But who’d lend money at negative rates? You’d be better off stuffing cash under your mattress. 🛏️💸

So the central bank is stuck – interest rates can no longer be the hype-man for the economy.

This sitch is what we call a liquidity trap.

In a liquidity trap, juicing up the money supply probably won’t jumpstart economic vibes.

Normally, more money supply would mean lower rates and encourage peeps to spend. 💳🛒

But when liquidity trap hits, people are just meh about having more cash. (That's usually 'cause banks play hard to get with lending, so no one gets to splash that cash.)

Interest rates don't budge, and the extra dough just chills in savings instead of hitting the stores. 🏦

To sum it up, cutting those interest rates usually gets peeps spending, but in a liquidity trap, all that money doing a shimmy dance won’t flip spending habits. So conventional monetary moves are kinda sus. 😅

Examples of ZLB

  • December 2008: The Federal Reserve (“Fed”) went full YOLO and slashed interest rates to between 0% and 0.25%. It stayed like that, ZLB vibes, until 2013.
  • March 2009: The Bank of England (“BoE”) dropped rates to 0.5% and kept it chill until 2013.
  • April 2020: In a plot twist move, interest rates were cut to zero by the Fed, ECB, and BoE thanks to Miss Rona's unexpected world tour. 😷🌍