The third approach is removing the zero lower bound by applying a negative short-term nominal interest rate. A central bank in Scandinavia for the first time after the global financial crisis developed a method to apply a negative interest rate to the central bank’s accounts held by private financial institutions.
Some central banks including the Bank of Japan introduced this thereafter, while making their own modifications as appropriate. As is often pointed out, interest rates cannot be reduced to arbitrarily negative levels, given the presence of banknotes in circulation. In addition, we also need to take into account various costs and risks, including the impact on financial institutions’ profits.