Even so, the central bank cannot lower policy rates without limit: at some point, firms and households may start switching to paper currency, which provides zero return. [4] A related but distinct argument is that there may also be a reversal rate of interest, below which decreases in the policy rate fail to be expansionary.
Accordingly, the principle that an effective lower bound on interest rates exists is valid, even if its exact value is subject to considerable uncertainty and likely varies over time. This lower bound, in turn, makes the conduct of monetary policy more challenging when inflation is below target. Furthermore, the decline in the steady-state real interest rate presents a significant challenge for monetary policy.