In view of the decline in potential growth and productivity in the developed economies, it is estimated that the “real equilibrium interest rate”, which provides full employment without creating inflation, is currently negative in the United States and probably also in the euro area. When inflation is so low, it is difficult to bring the economy into balance.
Another reason is that wages are not flexible. Wages cannot simply be lowered when inflation falls. This means that labour costs rise, which makes production more costly and reduces competitiveness. But many savers are worried about their pensions. Savers are confused by the “money illusion”. They look at nominal interest rates.