Economist John Maynard Keynes had spoken of a unique situation called the ‘liquidity trap’ which was applicable during the depression of 1930s when there was no demand for money; and hence even when supply increased it had little impact.
Money supply was increased by central banks to lower rates to make it attractive for borrowers. However, few were willing to borrow because of truncated demand for goods and services. His suggestion, therefore, was that the only way to move out was to have higher government expenditure.
Japan for long now has interest rates close to zero, yet remains in a rescission for years. Following the financial crisis, the Fed not just brought its policy rate close to zero but also started buying back bonds from banks so that liquidity was provided.
Two interesting questions need to be addressed. The first is whether this is the right route. The problem in the euro region is that the sovereign debt crisis has promoted stringent conditions to be imposed especially on the government debt levels and fiscal deficits to maintain stability in a system where there is single cut back heavily on spending which affected their progress to begin with. But things have turned around now with growth being fairly broad based in the region even though the absolute level is still low. Almost all the countries in this block are expected to grow by a positive rate with inflation also being non-negative.