In the worst-case scenario, one might worry that the interaction of deflation, the short-term nominal interest rate, and aggregate demand could conceivably touch off a destabilizing dynamic. Suppose that initially short-term nominal interest rates were already near zero and prices were falling.
If aggregate demand was sufficiently low relative to potential supply, deflation might grow worse, as economic slack led to more aggressive wage- and price-cutting. Because the short-term nominal interest rate cannot be reduced further, worsening deflation would raise the real short-term interest rate, effectively tightening monetary policy.