A Lower Bound on Real Interest Rates
Business Quest, Volume 23, Issue 1, pages 1-7, 2018
7 Pages Posted: 12 Oct 2016 Last revised: 18 Aug 2018
I show that real interest rates can be no lower than -100%. This contrasts with recent commentary suggesting that there is no lower bound on the natural rate of interest. I discuss how using the textbook approximation to the Fisher equation can lead to the erroneous belief that there is no lower bound on real interest rates, so this analysis serves as a reminder to avoid using this approximation when considering the effects of extreme levels of inflation.
Keywords: Real Interest Rates, Monetary Policy, Lower Bounds
JEL Classification: E43, E52
Suggested Citation: Suggested Citation