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 incorporates sticky price frictions, collateral constraints, and conventional monetary distortions. The model has neo-Fisherian properties. If the zero lower bound is a problem, then a symptom is inflation above the central bank's inflation target. Extended periods of low nominal interest rates are useful in bringing inflation down and relaxing financial constraints, not for forward guidance reasons. The ZLB may be suboptimal under tight collateral constraints. (Copyright: Elsevier)