Riksbank's Svensson solves liquidity-trap problem

Lars Svensson, the deputy governor of the Sveriges Riksbank, has devised what he has labelled a "foolproof way" to escape a liquidity trap.

Svensson told an audience at the Centre for Business and Policy Studies in Stockholm on Tuesday that central banks could use the exchange rate as a policy instrument once rates reached zero to avoid a liquidity trap, a situation in which nominal interest rates have been cut to zero but fail to stimulate the economy and lead to a drop in investment .

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