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ECB in liquidity trap?

2014: The euro crisis has been averted but problems still loom for the European Central Bank. Unemployment is record high and the economy has a long way to recover. Inflation is well below the bank’s target of below, but close to 2%. Improvement will take time.

At this point, the price of oil starts falling and threatens to pull inflation further down, possibly into deflation.

Project yourself into the role of the governor of the central bank, Mario Draghi. What should the ECB do?

The policy interest rate is already record low and close to zero. It may not be possible to lower it much further. Can the European Central Bank escape the liquidity trap? Are there other ways to stimulate the economy? Can the ECB get inspired  from the United States’ central bank. For several years, the Federal reserve, had engaged in quantitative easing, that is buying government and other bonds to bring down longer term interest rates. This could stimulate the economy but remained highly controversial in Europe.

So what should the ECB do?

 

By the end of the mini-case, you will be introduced to what the ECB actually did and the effect on the economy and inflation.

Have a try! Don’t hesitate to ask questions, leave comments or simply suggest other related cases we could build to help you go even deeper into the economic stakes of the Euro zone!

Are you interested in the Euro zone? Look at the mini-case The Euro zone and the new political initiatives: Could these new political initiatives finally turn the euro zone into a well-functioning monetary union?