Working Paper

Low Real Interest Rates and the Zero Lower Bound


Abstract: How do low real interest rates constrain monetary policy? Is the zero lower bound optimal if the real interest rate is sufficiently low? What is the role of forward guidance? A model is constructed that can in- corporate sticky price frictions, collateral constraints, and conventional monetary distortions. The model has neo-Fisherian properties. Forward guidance in a liquidity trap works through the promise of higher future inflation, generated by a higher future nominal interest rate. With very tight collateral constraints, the real interest rate can be very low, but the zero lower bound need not be optimal.

JEL Classification: E4; E5;

https://doi.org/10.20955/wp.2017.010

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2017-04-01

Number: 2017-10