During severe economic downturns, central banks cut their nominal policy interest rates to stimulate credit expansion. However, policymakers face a major boundary known as the Zero Lower Bound (ZLB). [1, 2, 3]

Because individuals and commercial entities can choose to hold physical cash notes—which yield a zero percent interest rate—commercial banks cannot easily impose deeply negative interest rates on retail accounts without triggering massive cash withdrawals.

[Policy Rate Reaches Zero Floor] ---> Traditional Interest Rate Cuts Terminated ---> Real Interest Rates Stalled ---> Accommodative Stance Blocked

When policy rates reach this nominal floor, the central bank cannot cut rates further to lower real borrowing costs, forcing policy committees to deploy unconventional instruments to support the economy. [1, 2]