Authorities have provided extraordinary assistance to the financial sector in the form of emergency liquidity, balance sheet guarantees, asset purchases, and recapitalization as appropriate. Ambitious and concerted discretionary fiscal measures have also been initiated and, together with automatic fiscal stabilizers, will help lift aggregate demand.
Equally impressive and timely action has been undertaken by monetary authorities through aggressive cuts to policy interest rates (see Chart 1) These short-term rates are now close to zero – the lowest level that nominal interest rates can go. Attempts to push nominal rates persistently below zero are bound to be ineffective, since investors always have the alternative of converting their securities into cash.