Negative Nominal Interest Rates

The determination of inflation is one of many examples in which economic outcomes are driven by an intricate interaction between private expectations and government policy. In these instances, achieving a good equilibrium outcome (e.g., low and stable inflation) requires the policymaker to adopt rules that are not only compatible with the desired outcome, but that also avoid the existence of different equilibria: it is a problem of strict implementation. Recently, some solutions to the implementation problem have generated a heated debate, spurred by a surprising disagreement on setting apart equilibrium conditions from restrictions on government policy that must hold under all contingencies. An example of this is the controversy over the fiscal theory of the price level. 1 In this paper, we consider an even more paradoxical case, namely, the zero bound on nominal interest rates. While most people view the bound to be a constraint on monetary policy, which cannot be violated under any contingency, the traditional macroeconomic models, based on a notion of competitive equilibrium adapted for the presence of a big player, make it equally possible to interpret the zero bound as an equilibrium condition. 2 Indeed, negative nominal