With nominal interest rates close to zero, the scope for using conventional monetary policy becomes very limited. However, this liquidity trap does not undermine central banks’ capacity for action. A recent study shows that they can stimulate the economy even in periods of low interest rates, and that they are therefore equipped to act effectively in response to the Covid-19 crisis.
Chart 1 – The effect of monetary easing remains positive in the euro area in ELB times Source: Lhuissier, Mojon and Jubio-Ramirez (2020). NB: The accommodative monetary policy decision (“monetary policy shock”) corresponds to a fall in two-year sovereign interest rates of the order of 10 basis points.