In December, the ECB announced a cut to its deposit rate and extended the timeframe for QE purchases. While the effects on domestic demand can’t be quantified yet, the move in the exchange rate has been less than encouraging.
The story’s similar for the BoJ’s recent foray into negative territory. In part, this may reflect the markets’ lack of confidence in these central banks’ abilities to affect the money supply.
With a binding constraint not far off in negative territory and bonds in both Germany and Japan already yielding less than zero well out the curve, the limit for rate cuts does seem near. But with fiscal policy not on the table, central banks might have to continue down the easing path even if it might prove largely ineffectual.
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