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Liquidity Trap |
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Liquidity Trap A situation in which prevailing interest rates are low and savings rates are high. As a result, monetary policy is ineffective. Notes: In a liquidity trap, consumers choose to avoid bonds and keep their funds in savings because of the prevailing belief that interest rates will soon rise. Since bonds have an inverse relationship to interest rates, many consumers do not want to hold an asset whose price is expected to decline.
Should the regulatory committee try to stimulate the economy by increasing the money supply, there would be no effect on interest rates as people do not need to be encouraged further to hold additional cash. |
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? Mentioned in | ? References in periodicals archive | |
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This has led some to insist that there was no liquidity trap in Japan, and that despite the zero-interest-rate policy, monetary policy made an important contribution to the expansion. Nobel laureate Milton Friedman used to tell his students at the University of Chicago that as a theoretical argument, the liquidity trap didn't make much sense since the central bank can always expand the money stock. Chapter 8 reveals that after the country's economic bubble burst, the persistence of the demand for stability in the first half of the 1990s and the sudden reversion of the institutional logic of coordination in 1996, contributed to a short-term liquidity trap and the development of economic conditions that can only bring about long-term economic stagnation. |
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Liquidity Trap
