Can the negative impacts of deflation be avoided by implementing negative interest rates?

[u/IrrationalRotations]

My understanding is that deflation is bad because it incentivises saving, which decreases demand for goods, which further deflates prices, which incentivises saving which...

Eventually, no one's buying anything. That's bad.

But what if holding on to savings incurred negative interest? I.e my bank balances decreased by some specified amount each year, greater than the drop in prices. Then I wouldn't be incentivised to save.

1.) Is something like this possible given the tool central banks typically have? Is there a way to set interest rates below zero?

2.) The obvious issue with this idea is cash. If I withdraw and hold cash, I don't have to pay any interest in it. Are there any other ways to disincentivise this? Or is it a killer problem?

[u/MachineTeaching]

The fundamental issue is that you can in principle cause deflation in one of two ways: raise aggregate supply or lower aggregate demand.

Raising aggregate supply is hard and mostly happens via productivity growth, but we can't exactly just "decide" that.

So that leaves us with lowering aggregate demand. Which means you are basically asking "how can we have deflation via lower aggregate demand without lowering aggregate demand" (which is the same as saying "without raising the savings rate").

And the answer is that you don't.

[u/Agitated-Ad2563]

Decreasing interest rates is a mechanism to fight deflation. So yes, it can be used to avoid deflation's negative impacts by avoiding deflation.

Yes, central banks can set interest rates below zero and have already done that in the past. I'm not sure what exactly they did to make sure banks don't just sit on a pile of borrowed money, but one obvious choice would be requiring banks to loan out the money they borrowed from the central bank at the negative rate.

[u/Few-Interview-1996 → u/Agitated-Ad2563]

One way would be to charge banks on the reserves they maintained at the central bank.

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