The zero lower bound is one of the great myths of monetary economics. It is the statement that interest rates cannot fall below zero, for otherwise people would hoard cash. Generations of central bankers have treated it as the equivalent of zero degrees Kelvin, the lowest theoretically possible temperature.
The Swedish Riksbank last week took the unusual step for a central bank of breaching the zero bound when it set a small negative deposit rate. The decision raises two questions. Should it be done? Can it be done? The answer to both is yes.
It should be done simply because real interest rates are presently not consistent with most central banks' inflation or price stability targets. Inflation is very likely to undershoot official inflation targets for some time to come. The reason is that interest rates are too high, because central banks feel trapped by an imaginary zero lower bound.