7.2 Monetary policy in the crisis

In the liquidity trap, central banks face the problem of having to control (or expand) the money supply without being able to lower the interest rate. The following bundle of measures are available to them:

Liquidity easing
Credit easing
Central banks act as consumers in certain markets in order to stabilize them and thus prevent a deterioration of the balance sheet of banks engaged in these markets. Hence, the ECB buys certain bonds so they do not lose value, because some of the banks that own these bonds would not be able to absorb the losses.
Quantitative easing
Central banks buy government bonds or government-guaranteed bonds to increase the money supply.

(c) by Christian Bauer
Prof. Dr. Christian Bauer
Chair of monetary economics
Trier University
D-54296 Trier
Tel.: +49 (0)651/201-2743
E-mail: Bauer@uni-trier.de
URL: https://www.cbauer.de