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Economics

Liquidity Traps and Zero Lower Bound Policies

Quick fact

During the 2008 financial crisis , several major central banks, including the US Federal Reserve and the Bank of Japan, hit the zero lower bound and had to resort to quantitative easing—buying financial assets to inject money into the economy.

Why this is interesting

Imagine a central bank trying to stimulate the economy by cutting interest rates, but rates are already at zero—what can it do next? This is the puzzle of the liquidity trap.