A central bank has set its policy nominal interest rate to its absolute minimum of 0% in an attempt to stimulate a struggling economy. If the public's expectation for inflation over the next year is 2.5%, what is the resulting real interest rate?

In an economy where the policy nominal interest rate is fixed at its lowest possible value of 0%, an increase in the public's expectation of future inflation will lead to a decrease in the real interest rate.

Economic Stimulus Challenge at the Interest Rate Floor

Policy Limitations at the Interest Rate Floor