Zero interest rate policy

The zero interest rate policy (ZIRP) is a macroeconomics scheme devised by economist Paul Krugman for economies exhibiting slow growth with a very low interest rate, such as contemporary Japan. Under ZIRP, the central bank maintains a 0% nominal interest rate, and then maintains inflation of the currency to make the value of otherwise stable investments, such as real estate, rise over time. It is effectively a way of imposing a negative interest rate, which is otherwise impossible to do.

For instance, with a 0% interest rate and 4% inflation rate, a house or commercial property will appreciate in value by 4% a year. This means that the return on the investment is calculated as if the interest rate is actually -4%.

The effect of a ZIRP policy is to encourage investment throughout the economy by making capital purchases more financially attractive.

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