The ZLB is floor not a ceiling
Again and again I see the economy's problem described along these lines:
"At the ZLB (zero lower bound), the real interest rate is too high to get us to the optimum. The nominal interest rate cannot fall any further by definition. So to get to the optimum the expected rate of inflation must rise."
Those are Simon Wren-Lewis' words (they appear in a comment at the link), but Krugman and many others tell roughly the same story.
As always, I have questions.
In the IS/LM framework many (not Wren-Lewis) are using, doesn't this mean that we are getting "growth" by firms investing in projects with a negative NPV now made profitable by an even more negative discount rate?
Second, how is that inflation expectations rise and the nominal interest rate remains unchanged?
From Fisher, we think of the nominal rate as the required real rate of return plus a premium to offset expected inflation. So it's hard for me at least to think about expected inflation doubling (from 1.5 to 3 percent) or tripling (from 1.5 to 4.5 percent) without the nominal rate rising. For that to happen the required real return would have to fall one for one with the rise in expected inflation.
In other words, the ZLB is a floor, but not a ceiling.