When nominal rates are negative, creditors pay debtors interest, and debtors earn interest on their debt. That is, instead of your money working for you, you have to work for your money. To explain why we are seeing these negative nominal rates, we can invoke the Fisher equation. In Denmark, Sweden, Switzerland and the euro area, rates of inflation, and  2  BIS central bankers’ speeches  expected inflation, had been falling and were near zero. Other things equal, the resulting real interest rates were too high for comfort. In an environment of low inflation, one policy to reduce real interest rates would be to boost expected inflation. However, there may be few or no easy ways to raise those expectations quickly; policies such as quantitative easing may take time to implement and have complications of their own. An alternative approach to reducing the real interest rate, the Fisher equation suggests, is for the central bank to set a negative nominal rate. In addition to this straightforward influence of negative nominal rates on real rates, setting negative nominal rates may stimulate the economy in less predictable and clear ways. For example, setting a negative nominal policy rate – a move that is, by nature, unconventional – may surprise people and thereby send a strong signal of the central bank’s intent to pursue its policy objective. Such a signaling channel may reinforce the effect of the negative rate and have an independent effect on boosting inflation expectations.
9  Ben S. Bernanke and Vincent R. Reinhart, “Conducting Monetary Policy at Very Low Short-Term Interest Rates,” paper presented at the International Center for Monetary and Banking Studies Lecture, Geneva, Switzerland. January 14, 2004. 10  See the Securities and Exchange Commission, “SEC Adopts Money Market Fund Reform Rules: Rules Provide Structural and Operational Reform to Address Run Risks in Money Market Funds” July 23, 2014 http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542347679 for a discussion of reforms that limited fixed NAV designs for money market mutual funds to retail and Treasury-only funds. 11  A theoretical model that captures this idea is described in Jess Benhabib, Stephanie Schmitt-Grohe, and Martin Uribe, “The Perils of Taylor Rules,” Journal of Economic Theory 96, (January/February 2001): 40–69. 12  There have been a couple of informal polls by Swiss newspapers. For instance, in December 2014, after the SNB first announced negative rates (25 bps), the Tagesanzeiger (one of the biggest Swiss newspapers) asked readers whether the decision was a good one. Of the respondents, 47.7 percent said, “Yes, it’s necessary to maintain the exchange rate” [the floor was still in place then], while 52.3 percent said, “No, this policy punishes savers.” http://www.tagesanzeiger.ch/wirtschaft/geld/Geldpolitik-Nationalbank-fuehrtNegativzinsen-ein/story/26525077). BIS central bankers’ speeches  9  Conclusion Even though nominal rates can become negative, zero is still an important benchmark: below that level of rates, society faces a distinctive set of complications and costs that can blunt the intended good effects of a negative nominal rate policy.