The Balkan Trio—consisting of Albania, North Macedonia, and Montenegro—experienced a surge in foreign direct investment and portfolio capital during the mid-2010s. Highly dependent on European financial markets, these transitional economies grew rapidly but faced substantial exposure to shifts in capital flight. By late 2019, they faced mounting fiscal strains, high unemployment, and volatile currencies.
A major driver of these capital flows was the monetary policy stance of the European Central Bank (ECB) and the Bank of Japan. Both central banks had pushed policy interest rates down to zero or negative territory. Despite these rock-bottom interest rates, commercial banks preferred to hoard reserves rather than lend, and consumer spending and business investment remained stagnant. Consequently, the ECB resorted to massive asset purchase programmes (quantitative easing) to inject cash directly into the banking system, hoping to stimulate a sluggish Eurozone economy.
Identify one piece of evidence in the stimulus material of the existence of a 'liquidity trap' and explain why it is an example of a liquidity trap.
