During the late 2010s, the Nordic Corridor—comprising Sweden, Denmark, and Norway—grappled with persistent deflationary risks and sluggish domestic demand. Despite robust export sectors, domestic consumption remained muted. In response, Sweden’s Riksbank and Denmark’s Nationalbank lowered their benchmark policy interest rates below zero, setting them at historic lows of -0.5% and -0.75% respectively, to discourage saving and encourage commercial bank lending. However, instead of stimulating economic activity, these negative rates coincided with a paradoxical surge in household savings rates, and commercial banks chose to maintain massive excess reserves at the central bank rather than expanding credit to businesses. This prompted the Riksbank to expand its sovereign and corporate bond purchase program to pump additional liquidity directly into financial institutions.
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.
