Monetary Policy of Negative Interest Rates in Eurozone and Japan

Since 2014, European Central Bank and Bank of Japan have entered into the unchartered water of modest negative nominal interest rates, when they broke zero lower bound. Large-scale asset purchases and forward guidance effects are limited by zero nominal bound if yield curve is absolutely flat. Negative interest rate has been implemented with the aim of reinforcing effects of unconventional monetary policy and lowering real interest rates. Therefore, another decrease in nominal yield curve should ensure, that inflation target will be met in a medium term horizon. Main goal of the paper is to reveal implementation, transmission channels and risks associated with the negative interest rates. Implementation was successful within the existing framework of the current monetary policy. Negative effective interest rate has been reflected in sharp drop of governments yield curve and mortgage rates. According current constellation of negative interest rates, monetary effect outperforms potential unintended impacts. On the other side, there are many risks mainly for financial stability and financial market functioning, if negative interest rates will be under effective zero lower bound or will persists for an extended period.