2) Roberts (1995) noted a possible connection between Keynes' views on the liquidity trap
and the constraints imposed by an international gold standard.
The issue is also highly relevant in the current era of low inflation: how to manage monetary policy to avoid deflation and potentially slipping into a liquidity trap
(of the type many observers believe is happening in Japan) is similarly sensitive to how inflation is determined in the short run.
For instance, the experience of Japan since the early 1990s has generated new work on how to avoid and escape from a liquidity trap
McCallum, "Inflation Targeting and the Liquidity Trap
," NBER Working Paper No.
Krugman shows that the liquidity trap
is not an artifact of the IS-LM model's incompleteness: even in a "modern" macroeconomic model based on intertemporal utility maximization by a representative agent, the liquidity trap
Specifically, they show that even if the steady state at which monetary policy is active is locally the unique equilibrium, there typically are an infinite number of equilibrium trajectories originating arbitrarily close to that steady state that converge to a liquidity trap
-- that is, a steady state in which the nominal interest rate is near zero and inflation is possibly negative.
As Japan wrestles with deflation and a potential liquidity trap
, Russia copes with fiscal insolvency and the possibility of hyperinflation, and the United States enjoys an era of approximate price stability, monetary topics are everywhere to be seen.
The insight that the solution to the problem of a liquidity trap
involves affecting private sector expectations of the future price level is due to Paul Krugman.
In Japan there is no evidence for a liquidity trap
Japan's economy has fallen into a so-called liquidity trap
, from which further easing of monetary policy cannot rescue it.
He noted that a policy of inflation would reduce the real demand for money and move the economy out of a liquidity trap
The Thai) economy is beginning to stabilize and do well, though there are still signs of the classical liquidity trap
," Chatu Mongol Sonakul, governor of the Bank of Thailand, told a news conference in Tokyo.