There appears to be little empirical backing for the theoretical risk that an economy may become stuck in a “liquidity trap” when close to, or at, the effective lower bound, new research finds.

In a Bank for International Settlements working paper, Stéphane Lhuissier, Benoit Mojon and Juan Rubio-Ramírez investigate whether central banks may run out of ammunition once the policy rate has reached the effective lower bound. They note that dynamic stochastic general equilibrium models tend to find