Ryan Avent of ‘The Economist’ considers how the next recession might happen — he asks the following questions:
- When will the next recession be?
- Where will it begin?
- Is the world prepared for a recession?
- What are the obstacles?
- What should governments do?
Very good viewing for macro policies – Unit 4 and 5 of the CIE A2 Economics course.
With the downturn in an economy, cutting interest rates has been the favoured policy of central banks. But the use of quantitative easing (QE) might mean the end of conventional monetary policy with rates already at record low levels – by pushing rates into negative territory they are actually encouraging a deflationary environment, stronger currencies and slower growth. The graph below shows a liquidity trap. Increases or decreases in the supply of money at an interest rate of X do not affect interest rates, as all wealth-holders believe interest rates have reached the floor. All increases in money supply are simply taken up in idle balances. Since interest rates do not alter, the level of expenditure in the economy is not affected. Hence, monetary policy in this situation is ineffective.