Many people find negative interest rates confusing. Why should anyone pay a bank to make a deposit? Why should a bank pay someone to borrow? How can we value an asset with a future cash flow when the interest rate is negative?

Policymakers also wonder whether the effects of negative interest rates on the economy are favorable or unfavorable. Do negative interest rates help central banks achieve price stability by stimulating economic activity? Do negative rates spur banks to make more good loans or to evergreen bad ones? Will borrowers and banks take on too much risk because they can fund investments at a negative rate? Will households reduce their saving rate because the return is so low, or raise it because low returns leave them farther from their wealth target? Will negative rates influence the ability of pension funds, insurance companies and governments to make good on their long-term promises to future retirees?

In this primer, we examine these questions, starting with key facts about negative nominal interest rates. Our conclusion: there is little magic about having a slightly negative, as opposed to slightly positive interest rates. Thus, much of the criticism of persistently negative nominal interest rates applies similarly to very low, but positive rates. That said, financial system frictions limit the favorable impact from modestly negative nominal rates, but our experience with them remains limited. Given the likely need for unconventional policy tools to address the next recession, learning more about the benefits and costs of negative nominal interest rates is a high priority….