Central Bank Policy Effectiveness

Imagine two economies, Country A and Country B, are both entering a recession. For the past decade, Country A has maintained an average inflation rate of 0%, while Country B has maintained an average inflation rate of 2%. Both central banks want to stimulate their economies by lowering their main policy interest rate. Which central bank is likely to have more flexibility to create a powerful stimulus, and why?

Inflation and Policy Flexibility

A sustained period of zero percent inflation provides a central bank with maximum flexibility to use interest rate cuts to combat an economic downturn.

The Rationale for a Positive Inflation Target