Escape from the Central Bank Trap, 2nd Edition

CHAPTER 2

Central Banks Don’t Print Growth

“It’s true, you can do anything you want to do”

—Phil Lynott

A liquidity trap is a situation when expansionary monetary policies, such as the increase in money supply, fail to stimulate economic growth because economic agents prefer to hold on to cash at any given rate, even with negative real interest rates. This happens because of the fear of more adverse events and the lack of attractive opportunities to deploy funds.

If there is a clear example of what a liquidity trap is, we can find it in the European Union.

Since the launch of QE in January 2015, until the end of 2016, the ECB has expanded its balance sheet by more than €2 trillion to reach 35 percent of the eurozone GDP.¹ While growth and inflation ...