During the global financial crisis, a combination of bank deleveraging and plummeting consumer and business confidence warranted an aggressive monetary easing such that short term interest rates reached the zero lower bound.
a) Explain the mechanism through which quantitative easing might have enabled further stimulus to the economy under these conditions.
b) Explain the mechanism through which forward guidance might have enabled further stimulus to the economy under these conditions.
c) Discuss the effectiveness of and potential risks involved in utilising these unconventional tools of monetary policy.