When, if ever, is it a good idea for governments and central banks to set interest rates at ultra-low or negative levels?
Ultra-low interest policies have been a feature of global monetary management since 2008 in most countries (and were tried in Japan before that.) They exist in the context of the near-collapse of the global economy and of national and international banking, credit, and derivative markets in 2008, though they also reflect a perceived lack of inflation risk. The idea behind ultra-low interest rates, or negative real or nominal rates, was, firstly, to prevent a credit crunch. Credit crunches happen when banks have lent out a great deal of money and cannot fund a large volume of withdrawals. This causes banks to reduce refinancing and new lending, which puts individuals and businesses in a position where they cannot stay in the market and pay their bills and debts, thus creating a spiral of economic decline. In addition, banks might in such circumstances start asking for their loans and credit payments back early, worsening things still further. Many modern banks also are princip...