While zero interest rate policies can provide short-term economic stimulus and support recovery, they can also create risks of speculative bubbles and long-term inefficiencies in the economy. The long-term stability of an economy under ZIRP depends on various factors, including fiscal policy responses, regulatory frameworks, and the broader global economic environment. Policymakers need to carefully monitor the effects of such policies and be prepared to adjust them as necessary to mitigate risks.

ZIRP can disproportionately benefit wealthy investors, who are better positioned to take advantage of low borrowing costs and rising asset prices, thereby exacerbating income and wealth inequality.

If interest rates remain low for an extended period, consumers and businesses may become desensitized to borrowing or may delay spending, reducing the policy's effectiveness.

Prolonged periods of very low interest rates can lead investors to seek higher returns in riskier assets, potentially creating bubbles in markets such as real estate, stocks, or cryptocurrencies. These bubbles can lead to financial instability if they burst.

Persistently low rates can encourage over-investment in certain sectors while neglecting others, leading to inefficiencies in the economy. This may result in a lack of innovation and increased corporate debt levels.

___________

A zero interest rate policy (ZIRP) can have both stabilizing and destabilizing effects on the economy, and the outcomes often depend on the broader economic context, the duration Dariusz Prokopowicz of the policy, and how it is implemented:

But an increase in the quantity of money and fiduciary media will not enrich the world. … Expansion of circulation credit does lead to a boom at first, it is true, but sooner or later this boom is bound to crash and bring about a new depression. Only apparent and temporary relief can be won by tricks of banking and currency. In the long run they must lead to an all the more profound catastrophe.

Lv Misses

____________________________

In the economic sphere, an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them …

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen. Yet this difference is tremendous; for it is almost always the case that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Hence it follows that the bad economist pursues a small present good that will be followed by a great evil, while the good economist pursues a great good to come, at the risk of a small present evil.

Lv Mises

PS/Frédéric Bastiat described this phenomenon in 1850 in his ground-breaking essay “What Is Seen and What is Not Seen”:

A zero interest rate policy (ZIRP) can have mixed long-term effects:

• Pros (Stability & Growth): It encourages borrowing, investment, and economic growth, particularly in downturns. Low rates can support employment and corporate expansion.
• Cons (Speculative Bubbles): Prolonged ZIRP can lead to excessive risk-taking, asset bubbles, and misallocation of capital. It may also weaken financial institutions' margins and reduce the effectiveness of future monetary policy.

A zero interest rate policy (ZIRP) can boost economic growth by encouraging borrowing, spending, and investment. It helps reduce unemployment and prevent deflation.

However, it also has risks. Cheap credit can lead to speculative bubbles in stocks, real estate, and other assets. It may encourage excessive risk-taking, misallocation of resources, and widen wealth inequality.

While ZIRP can stabilize the economy in the short term, prolonged use often increases financial instability and market volatility.

During short run it may be a effective tool, but during long run it will very negative impact on economy.

Does a zero-interest rate policy lead to long-term economic stability, or does it lead to speculative bubbles in financial markets?

Interest, or usury, entails taking people's money without compensation. This makes it difficult for people to bear the burden of earning, trading, and laborious industries. This leads to the cessation of human benefits. It is well known that the world's interests are only regulated by trade, crafts, industry, and construction.

Raising interest rates is a decision that favors the wealthy, as it leads to their wealth expanding without work or productive investment. Furthermore, increasing interest rates increases the poverty of borrowers, in the full sense of the word. This is one of the reasons why Islamic law prohibits usury, and it encourages banks to participate in trade and investments and obtain their share of the profits. Countries that have adopted zero interest rates have subsequently increased investment and had positive effects on unemployment and the consumer price index. The primary benefit of zero interest rates lies in their ability to stimulate economic activity, combat recessions, create new jobs, and reduce unemployment rates. Zero interest rates lower the cost of borrowing, prompting banks to lend money to individuals, investors, and businesses. This leads to increased household consumer spending, increased demand for goods, increased productive investment, and new job opportunities, thus stimulating the economy in general. Prices may rise (inflation), but to economically beneficial levels.

The International Monetary Fund's policy of raising interest rates has proven to be an ineffective cure for inflation; rather, it is the disease itself, as it increases the cost of production, raises the prices of goods and services, and fuels inflation.

The Japanese government was the first to implement a zero interest rate policy since the 1990s, following the collapse of the Japanese asset price bubble. As part of its monetary policy, it has continued to do so to this day due to its success. Regarding providing liquidity for investment in financial markets, one of the conditions of zero interest rates is that loans are granted only for economically viable investments, including financing new corporate issues in financial markets. This prevents a bubble, as funds are directed toward real investments.

Zero or negative interest rates policy will be followed by a country only if that country is suffering from deep recession or depression and unemployment as which happened during great depression or in Japan in 1980s .But Keynes argued that interest rates especially nominal interest rates can not be reduced beyond a low ceilings because of the liquidity trap and the demand for money will become infinitely elastic at a low level.The US Federal Reserve system to reduce interest rates adopted a policy of buying a large quantity of financial and other assets or liquidity easing .Some economists argued that if nominal interest rates can not reduced beyond a level of floor , the real interest rates can be reduced by creating inflationary expectations.But that is also not possible in a depressed economy.In the USA after COVID the internet rates were reduced near zero level by large scale liquidity easing .But subsequently it led to higher inflation in the USA.

A zero interest rate policy may support short-term stability and recovery, but prolonged use can distort asset prices, encourage excessive risk-taking, and fuel speculative bubbles in financial markets, thus potentially undermining long-term economic stability and increasing systemic vulnerabilities.

Zero interest rates must be accompanied by a revision in lending policies. Lending here would be limited to economically viable investment projects.

I may add to my earlier answer another point about the importance of the quantity of money supply during the time of near zero interest rate policy .As very recently pointed out by Peter N Ireland ( 2025 ) when we contrast two important recent US recessions of 2008-09 and 2020 US recession following COVID and shocks to supply chains , during both recessions the interest rates were made near zero by the Federal Reserve Bank through quantity easing of buying long term bonds and other assets ; but during the 2008-09 recession the growth of broad money was less and during 2020 US recession the growth of broad money was higher so that during and immediately after 2008-09 recession the prices were falling and during and immediately after 2020 recession the prices were increasing and even it substantially cost Biden his presidency .According to Peter Ireland and to me also the importance of money supply as an indicator of the Macroeconomic environment is getting lost to Central bankers in the USA and in India also ( only Indian case According to me .) I hope to publish my results in a good journal.

A zero interest rate policy can provide short-term economic stimulus, but over the long term, it often distorts asset prices and encourages excessive risk-taking, potentially leading to speculative bubbles in financial markets and financial instability rather than sustainable economic growth.

Yes zero or near interest rate policies are adopted only during severe recessions when aggregate demand and investments are falling much .Then if the economy is not in liquidity trap it will stimulate investments and employment .But if the economy is in liquidity trap near zero interest rates will not stimulate investments. At that point of liquidity trap Keynes has advocated fiscal policy and increased government expenditures. However during 2008-09 and 2020 recessions another tool of monetary policy called ' Quantitative easing ( QE ) was used by central banks in the USA , Europe and the UK .The QE means basically the purchase by the central bank from the bank and public the long term government bonds and also risky assets such as housing mortgages and sell to the banks and public risk less money .This was supposed to stimulate the bank reserves and more lending and also for the public to substitute money with either goods or with corporate bonds and equities and their prices increase and through wealth effects increase consumption and aggregate demand. The actual experiences were mixed .During 2008-09 recession the despite QE the investments and aggregate demand did not sufficiently increase .But during 2020 recessions the QE increased aggregate demand and prices increased much as during 2020 recession the basic issue was aggregate supply shocks and disruption in supply chains .During these 2020 recession if the zero interest rate policy was continued yes it would have resulted in financial bubbles.

Zero interest rate policies can support short-term growth and debt servicing but often fuel speculative bubbles by incentivizing excessive risk-taking in asset markets. Over time, they may distort capital allocation, widen inequality, and limit central banks’ ability to respond to future crises, threatening long-term stability.

A zero interest rate policy may stimulate growth in the short term but often leads to asset bubbles and financial instability if prolonged without structural economic reforms.

While a zero interest rate policy can support short-term economic activity, prolonged use may lead to asset bubbles, financial instability, and distorted savings behavior, highlighting the need for macroprudential oversight and eventual policy normalization.