The problem is that the conventions evolved for a positive interest rate environment, and efforts to reverse the direction of these incentives can lead to bad economic outcomes for society. Furthermore, it is costly to change these conventions. In many economic arrangements, including debt and tax payments, people can prepay debts or tax obligations, or make excessive payments on them, and earn a zero return during the prepayment period. For example, suppose that one holds a credit card under existing U.S. rules: one can withdraw funds from an account that is earning a negative rate, and pay one’s  5  Kenneth Garbade and Jamie McAndrews, “Interest-Bearing Securities When Interest Rates are Below Zero,” Liberty Street Economics blog, May 4, 2015. 6  “NEGATIVE INTEREST RATES ON MORTGAGES” Working Group on negative interest rates on mortgages, Business and Growth Ministry, Denmark https://www.evm.dk/~/media/oem/pdf/2015/15–04–28-negativerenter.ashx. 6  BIS central bankers’ speeches  debt to the credit card company in advance of when it is due, earning a zero return during the prepayment period. Similarly, one can make excessive tax payments to the taxing authority, and earn nothing during the period before one receives a refund, thereby avoiding negative deposit rates at banks. Such “zero nominal rate” conventions abound in society, and the lower the negative rate, the more people will search for such ways to avoid the negative rates that might prevail elsewhere.
So given that, once one has waded into the ocean and implemented a negative nominal rate, how low can rates realistically go? Unfortunately, there is no simple answer. As I have noted in this talk, negative nominal rates introduce a number of legal, operational, and economic frictions associated with. These complications limit the pass-through of negative nominal policy rates to households and businesses. In addition, because the negative rates are costly in terms of resources, they limit the potential stimulus to aggregate demand. Negative nominal rates may also adversely affect the profitability of financial institutions and thus make financial conditions less accommodative than they would be otherwise. Addressing the complications of negative nominal interest rates includes redesigning debt securities; in some cases, redesigning financial institutions; adopting new social conventions for the timeliness of repayment of debt and payment of taxes; and adapting existing financial institutions for the calculation and payment of interest, the transfer and valuation of debt securities, and many other operations. These innovations will require considerable time, resources, and effort. A benefit-cost analysis thus must weigh the potential advantages of negative rates against the costs of pushing back the tide of all of these conventions and institutions that have proven useful under positive nominal interest rates. That calculation likely will differ across countries, across institutional environments, and across the expected levels and duration of negative rates. 10  BIS central bankers’ speeches