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Zero-interest Rate Policy and Unintended Consequences in Emerging Markets


  • I thank an anonymous referee and the editor of this journal for very useful suggestions that helped substantially improve the paper. Further I would like thank Edward Chancellor (GMO Investment), John Cochrane (MS University of Denver), Enrico Colombatto (Turin University, ICER), Mario Rizzo (New York University), Joseph Salerno (Pace University) and Gunther Schnabl (University of Leipzig) for insightful discussions on the topic, encouragement and valuable support.


Since 2009, central banks in the major advanced economies have held interest rates at very low levels to stabilise financial markets and support the recovery of their economies. This paper outlines the unintended consequences of the prolonged period of very low world funding interest rates in emerging markets. The paper is informed by a Mises–Hayek-BIS view on credit booms and Mises' law of unintended consequences. Consistent with the presented credit boom view, I provide evidence that the very low world funding interest rates are associated with a rise in volatile capital flows and asset market bubbles in fast-growing emerging markets. In line with Mises' law, I further show that these unintended consequences give rise to a new wave of interventionism as policymakers in emerging markets increasingly reintroduce financially repressive measures to isolate the economies from foreign capital inflows.