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

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.

Analyzing Monetary Policy Constraints in a Low-Inflation Environment