Of course there is no liquidity trap - the case of the Czech Republic

Of course there is no liquidity trap - the case of the Czech Republic
For the past five years we have again and again heard the same story: "If interest rates are at zero then monetary policy can't be eased any more. We are out of ammunition." Any monetarist would of course know that this is rubbish. Of course monetary policy can always be eased - also at the Zero Lower Bound. Obviously a central bank stuck at Zero Lower Bound can always just do quantitative easing - print some money and buy some assets. That is simple. Another options is what Lars E. O. Svensson has termed the foolproof way out of deflation - the central bank can intervene in the currency market - buying foreign currency and selling its own currency. That's equally simple. However, central bankers seem to have some mental constraints, which make them reluctant introducing such measures. Some central bankers have, however, be able to overcome these mental constraints. A good example is the Czech central bank (CNB). Well done Miroslav! After years of overly tight monetary policy and an increasingly large deflationary problems the Czech central bank finally acted back in November last year. Hence, the CNB decided to put a floor under EUR/CZK at 27 - effectively devaluing the Czech koruna by 4%. This is not a major devaluation, but if the purpose was to boost nominal spending (that is really was you do when you ease monetary policy) then it surely work. Just take a look at this graph.      


WORLD LEADING ADVISORY SPECIALISING IN THIS TOPIC

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