The author shows that the short-term nominal interest rate can anchor private-sector expectations into low inflation … given asset price system at date t = 0. While there are usually many sustainable inflation paths associated with a given set … of asset prices, the best sustainable inflation path is implemented if and only if the short-term nominal bond is priced …

Motivated by the recent experience of the U.S. and the Eurozone, the authors describe the quantitative properties of a …