The limits of monetary policy: From the liquidity trap to the zero lower bound

Abstract

This article analyzes the limits of monetary policy from a theoretical perspective. The analysis parts from Keynes’s theory presented in the General Theory in which the ideal of the liquidity trap is highlighted. Other limits faced by monetary authorities are also recognized, the analysis of uncertainty and expectations being fundamental. This is opposed to the concept of the zero lower bound (ZLB) which is used to indicate the current limits of monetary policy. The article concludes that the lack of current recognition of expectations prevents monetary policy from exceeding the limits it faces, rescuing the important role that fiscal policy plays as an alternative to influence the economic cycle.