If we assume the central banks lower their reserve ratios (you know, like they already did), no deflation would happen. If the reserve ratio stays the same, then deflation would eventually happen. However, even if there is deflation, people will still be willing to lend out cash as reducing their cash holding means they reduce the amount of tax they have to pay. You would most likely always see full employment according to "Say's Law".
This is a much better idea than having a zero lower bound and an endlessly growing welfare state.
I mean, imagine if you didn't have to pay for municipal garbage collection. You would produce more trash than is optimal as someone else is eating the cost. A guaranteed legal minimum wage that is excessively high (think $50 per hour) also encourages more workers to apply for jobs than is optimal.
The zero lower bound not only contains a price control, it also contains an implicit subsidy that guarantees that the government has to subsidize the difference between the interest rate on the capital market, which may in theory be negative and the guaranteed interest rate on cash. It may not sound like a subsidy since no money is being paid, except if you don't pay the subsidy you get something like the great depression. The economy grinds to a halt. The subsidy has to be paid indirectly, the government has to guarantee to keep borrowing enough money until the interest rate is above 0%. I.e. the government has to take on more debt than is optimal and then it somehow has to recycle it back into the private economy. It will have to micromanage more and more parts of the economy simply because of some illogical decision to say "the private capital market ends at the zero lower bound". This is why I am in favor of negative interest rates above some threshold like $250k.