Stabilisation Policy Options in a ‘Lower and Longer’ Interest Rates Environment

During episodes of severe depression, interest rates can approach the zero lower bound (ZLB) and stay there for a fairly long time. Mainstream macroeconomic theory (the so-called New Consensus Economics) then fails to provide adequate guidance under a Taylor type rule to conventional monetary policy. Various alternatives have been suggested to revitalise monetary policy in such a situation. The major alternatives can be divided into three categories, namely, (a) those that do not recognise the ZLB as an effective floor, (b) those based on the Keynesian liquidity trap and (c) those based (implicitly) on Hawtrey’s credit deadlock. We discuss these alternatives with a special focus on quantitative easing (QE). In particular, we draw attention to the largely ignored fact that QE had been suggested by the British economist Hawtrey at least as early as 1931 in the policy debates on ways to emerge from the Great Depression. JEL Codes: E4, E5, N1