For instance, when there are modest adverse shocks to demand that lead to modest reductions in the shorter-run neutral rate, monetary policy can provide enough support to keep the economy at full employment simply by reducing the policy rate commensurate with the decline in the nominal neutral rate.
However, when the adverse shocks to demand are sufficiently severe to push the nominal neutral interest rate substantially below zero, as they were during the Great Recession, monetary policy confronts the zero-lower-bound constraint, at which point the federal funds rate cannot fall low enough to provide the necessary degree of accommodation without becoming negative.