The episode of acute (global) deflation was last observed in the 1930s, during the Great Crisis. At present, over fifty years later, the fear of a fall in prices has revived.

This fear is fuelled mainly by falling inflation rates in the world economy to the levels not seen since 1950s. The low inflation rate is in many economies accompanied by low business activity, despite the fact that the nominal interest rates are close to zero.

The paper examines the effects of deflation, as described in the literature on the subject and compares them with the examples of various experience of deflation. In the meantime. it tackles an important - according to the author - yet rarely asked question: "How far can a central bank go in decreasing interest rates to prevent deflation?" The study also outlines a mechanism underlying a situation where a decrease in interest rates from a low to a very low level increases the risk of deflation instead of reducing it.