Low inflation (for example, around 1% per annum) accompanied by a
drop of the equilibrium rate of interest into substantially negative
territory and a nominal interest rate approaching the ZLB, causes serious problems for policy-makers and central bankers. Such
circumstances would make it impossible to achieve a sufficiently
low real interest rate to equate savings and investments at full
employment, that is, to make the real interest rate r coincide with the
equilibrium rate r* (see Figure 4). Growth would remain sluggish and
the economy would continue to operate below potential (GDP2 is smaller than GDP1), ‘leading to disinflation and leaving output and unemployment gap open.
Be the first to write a comment.