In my previous post, I argued that for monetary policy to be effective in a liquidity-trap like slump, the increase in the monetary base has to be seen as permanent. That is, if the central bank signals and the public believes that a large enough portion of the expanded monetary base will be permanent even after a recovery takes holds, then investors will realize the monetary base and treasury will not be near substitutes in the future. Consequently, they will start rebalancing their portfolios today and that, in turn, will spur growth in aggregate demand.
What I did not spell out is how this would unfold if the Fed continues to pay interest on reserves (IOR). The same conclusion holds, but in addition to the Fed permanently maintaining some portion of its expanded balance sheet it would require the central bank not to raise the IOR as other market interest rates rose. Another way of saying this is that as the recovery pushed up the equilibrium or natural interest rate, a decision by the Fed to keep the IOR pegged at 0.25% will result in more inside creation, more spending, and ultimately higher inflation for a given stock of the monetary base. For a more thorough discussion of this point, along with some summary tables, see this earlier post of mine as well as this one by Steve Randy Waldman.