Is the euro area drifting into a liquidity trap (a combination of low interest rates and low inflation) as a consequence of the corona crisis? There is a heightened risk of this, but the policy measures taken are preventing negative trends.
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According to the Bank of Finland’s model simulations, the tariff rises already introduced will serve to slow global growth by 0.7 of a percentage point.
The Bank of Finland has calculated alternative scenarios on the effects of risks to the global economy. In these scenarios, global growth weakens more abruptly than currently forecast.
In the aftermath of the global financial crisis many central banks cut their policy rates close to zero and introduced non-standard monetary policy measures. The new situation has also presented a challenge for monetary policy modelling.
Euro area inflation has been slow in recent years. The way slow inflation was explained before the crisis has been challenged.
During the last 10 years, the natural rate of interest in the advanced economies is estimated to have declined substantially. However, estimates of the level of the natural rate of interest are uncertain, which hampers the use of this interest rate as a monetary policy guide.
Before the current recession, Finland was closing the gap on Europe’s wealthiest small economies but is now falling ever further behind.