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Foreign exchange and the liquidity trap

Author

Listed:
  • Owen F. Humpage
  • William R. Melick

Abstract

When short-term interest rates hover near zero, central banks may have difficulty offsetting downward momentum on prices and economic activity through traditional monetary-policy channels, since commercial banks have little incentive to make loans. Economists refer to this situation as a liquidity trap. Do exchange rate targets and foreign exchange operations, as some have suggested, offer a way to escape such a trap?

Suggested Citation

  • Owen F. Humpage & William R. Melick, 2003. "Foreign exchange and the liquidity trap," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct.
    • Handle: RePEc:fip:fedcec:y:2003:i:oct1
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