A central bank operating with its policy rate at the zero lower bound can achieve any desired negative real interest rate, as long as the public's inflation expectations are positive.
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Evaluating Monetary Policy Effectiveness at the Zero Lower Bound
A central bank has lowered its nominal policy interest rate to 0% to combat a severe economic downturn. The bank's models suggest that a real interest rate of -2.5% is necessary to stimulate the economy. However, a recent survey indicates that the public's inflation expectation for the coming year is 1.5%. Given this situation, which of the following statements accurately describes the central bank's position?
Inflation Expectations and Monetary Policy Limits
Analyzing Monetary Policy Constraints in a Low-Inflation Environment