A Lower Bound on Real Interest Rates

Abstract

I show that real interest rates can be no lower than -100%. This contrasts with recent commentary suggesting that there is no lower bound on the natural rate of interest. I discuss how using the textbook approximation to the Fisher equation can lead to the erroneous belief that there is no lower bound on real interest rates, so this analysis serves as a reminder to avoid using this approximation when considering the effects of extreme levels of inflation.