The Real Interest Rate Floor at the Zero Lower Bound
The zero lower bound (ZLB) on nominal interest rates creates a lower limit, or floor, for the real interest rate that a central bank can achieve. This floor is determined entirely by the public's inflation expectations. According to the Fisher equation, since the nominal interest rate cannot go below zero, the real interest rate becomes the negative of the expected inflation rate. This implies that if the public expects deflation (negative inflation), the real interest rate will be positive, potentially hindering economic stimulus efforts.
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Introduction to Macroeconomics Course
Ch.5 Macroeconomic policy: Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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