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Sources of Financial Instability: Challenges for Monetary and Fiscal Policy | Claudio Borio

Hidden Forces

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Are We in a Liquidity Trap?

Is it fair to say that central banks are caught in a liquidity trap, where they can't raise interstrates too much because the debt has grown so out of control since the early eighties? Is that fair? I think that taking it too far. We don't know whether we are in the ded trap or not. And clearly, what we can say is, of course, that the high det levels, all else equal, would imply less room for manoeuvre. If interest rates are very, very low, and if bu sheets are very large, the marginal effectiveness of a monitary policy isn't as high as it was in the past.

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