Deflation and Zero Interest Rates: Underlying Causes, Implications for Economic Policies and Consequences for the Financial Sector

This article first describes the fundamental causes of a deflation: a situation of excess of supply of goods and services which cannot be corrected anymore by the reduction in real interest rates. It shows afterwards that, in a deflation, the economic policies which have positive effects in normal circumstances become dangerous. It examines finally the effects on the macro-financial equilibrium of the situation of interest rates at the zero bound limit.