Five central banks have introduced negative policy interest rates since mid-2014 -- the European Central Bank, followed by the central banks of Denmark, Switzerland, Sweden and, on Jan. 29, Japan. The reason for the strong reactions of the public and some politicians to what is really a conventional monetary policy action was our unfamiliarity with negative nominal interest rates.
Historically, anticipated real (inflation-corrected) interest rates have been 2% or higher in most of the world, and inflation rates since World War II have seldom fallen below 2%. Japan was the first country in my lifetime to experience persistent deflation. The financial crisis of 2008-2009 and the global recession that followed it lowered equilibrium real interest rates into negative territory and drove inflation well below the 2% target set by many central banks. To stimulate the economy, central banks cut rates as far as they could. They discovered that policy rates below zero were indeed possible.
