Question

Why is it so important when the nominal policy interest rate is at the zero lower bound to maintain a positive expected rate of inflation?

Answer 1

if the nominal interest rate offered on a three-year deposit is 4% and the inflation rate over this period is 3%, the investor's real rate of return is 1%. On the other hand, if the nominal interest rate is 2% in an environment of 3% annual inflation, the investor's purchasing power erodes by 1% per year.