Stephanie Schmitt-Grohé

Stephanie Schmitt-Grohé is an expert on international macroeconomics and monetary stabilization policies. Her work covers a wide range of topics, addressing unemployment, inflation, or trade. The economist’s key focus is on effective tools for government intervention.

Interview

Stuck in a Liquidity Trap

Stephanie Schmitt-Grohé explains that if interest rates are low and saving rates are high, economies get stuck in a liquidity trap. If interest rates can't fall any further, a central bank has no tool to stimulate the economy. Monetary policy becomes ineffective. “In a liquidity trap, monetary policy is constrained. There’s no policy space left,” explains Schmitt-Grohé. “Inflation is below target, and expected inflation, five or ten years out, is also below target.” Schmitt-Grohé says that inflationary expectations are “unanchored.” People don’t believe that the central bank will be able to meet the inflation target anytime soon and take it that the new normal is a world with inflation lower than the central banks’ commitment.

The Eurozone Crisis and Currency Pegs

One of Stephanie Schmitt-Grohé's research areas is record-low interest rates and low inflation over a long period of time. While too high levels of inflation are undesirable, Schmitt-Grohé explains that moderate inflation is a sign of a healthy economy as it, in multiple dimensions, aids the growth of an economy. Unfortunately, though, many countries have been undershooting their inflation target for years, which may impact the public opinion on central banks’ ability to steer the economy.

What Can Central Banks Do?

Markets don't work perfectly and stabilisation policies by governments and central banks are crucial. In her research, Stephanie Schmitt-Grohé looked at different policy options to address the unemployment crisis that hit in many countries as a result of the economic shock from the financial crisis of 2007-08. One solution was to better regulate capital inflows: moderate wage growth in the boom years would have helped ameliorate the unemployment problem of the subsequent crisis.