events from changes in the tool ( the policy rate ) to the final effect on the target variable ( inflation ), was assumed to be stable and to have few details. and monetary policy worked in that when the interest rate was cut, demand was stimulated, meaning that capacity utilisation rose and thus so too did inflation. of course, when such models were used to compile background material at central banks, larger models with more variables became necessary. but the transmission mechanism remained very clear and simple, and details on how the financial sector works were not explicitly included. however, as instructional tools to illustrate important points about inflation targeting ( for example, the balance between real economic stability and how quickly inflation can be brought back to the target after a shock ), the models worked well. see, for example, bailey et al. ( 2020 ) for a description of how the bank of england ’ s monetary policy has changed since before the financial crisis. 4 the financial crisis showed that more complex models were needed... for a more thorough and detailed discussion of monetary policy in practice, models like this were insufficient and this became obvious in conjunction with the financial crisis over ten years ago, if not sooner. there were several reasons for this. the first reason was that, as the financial markets had a subordinate, or almost non - existent, role in the models, the consequences of shocks on the financial markets could not be described. the models certainly included households that save and companies that invest, but in some way, these were assumed to find each other without financial intermediaries like banks or somewhat developed financial markets. it was basically assumed that all saving and lending took place in the form of a certain kind of bond and it was also the interest rate on this that the central bank could directly steer. this might not be such a bad simplification if the financial markets were relatively frictionless and various actors on the financial markets were easily able to make deals with each other. in such a world, interest rates with longer maturities would depend, to a great extent, on expectations of the policy rate in the future. it also assumes that the information needed by households and companies to take decisions is free and evenly spread ( which is to say information is not asymmetric ).... and that the view of the financial markets was oversimplified precisely this assumption that the financial markets were frictionless was one reason why it was difficult to understand the driving forces behind the global financial crisis of 2007

questions, not all of which would be strictly economic. the economic questions include the effects of negative interest rates on the functioning of the banks and on their profitability, something that is perhaps more important in countries other than sweden. the idea is that there is a boundary beyond which interest rate cuts de facto become counterproductive in that lending becomes impeded. 13 another economic question concerns the well - known reasoning that there is a point at which the general public decides to withdraw all its savings and convert them to cash or go over to using some other currency so as to avoid a negative interest rate. a question of public confidence the classic objection to negative interest rates may need to be complemented by other, less macroeconomic reasoning that concerns public confidence in the central bank and the country ’ s currency. the central bank is an important institution in most countries and its remit means that it takes responsibility for confidence in the means of payment, the country ’ s own currency. this can be expressed as the central bank having responsibility for price stability, but, just as much, it is a matter of ensuring that there is an efficient payment system in the country. as i said, there is an international debate on the importance of being able to cut policy rates to far below zero, and it is being discussed how this could be achieved in practice with various technical solutions. see, for example, rogoff ( 2020 ). 13 see, for example, brunnermeier and koby ( 2018 ). 9 something possibly missing from this discussion is how the general public ’ s confidence in their country ’ s own currency / means of payment would be affected. if one unit of saved currency suddenly gives less than one unit of currency back, what would happen to the public ’ s willingness to hold that currency? negative real interest rates are certainly nothing new, and this phenomenon has not been linked to any undesired effects on behaviour. consequently, according to economic theory, negative nominal interest rates should not be any different as it usually assumes that it is real interest rates that are important to our decisions to consume or invest. however, this assumption is not undisputed, and there are plenty of examples to indicate that people often think in nominal terms. in such cases - is it self - evident that the general public will consider that the economic advantages of cutting the interest rate to far below zero justify the nullification of old rules on for example saving – that you will at least get back what you saved?