A situation John Maynard Keynes described in which interest rates are already so low that conventional monetary policy loses traction: the public, expecting rates to rise or prices to fall, hoards cash rather than spending or investing regardless of further monetary easing. Keynes proposed the Great Depression as an example and argued fiscal spending, not monetary policy alone, was needed to escape it; near-zero policy rates after the 2008 financial crisis and in Japan since the 1990s revived the concept as a live policy concern.
Facts
FieldMacroeconomics, Monetary Economics 1 Proposed ByThe term 'liquidity trap' itself is usually credited to Dennis Robertson's 1940 review of Keynes's theory, not to Keynes's own 1936 text. SignificanceA liquidity trap matters because once it takes hold, ordinary interest rate cuts lose their power to stimulate the economy, which is why the Great Depression, Japan's Lost Decades and the Great Recession are all cited as real world cases of the condition. 3 Connections
Associated With
Source The New Palgrave Dictionary of Economics
Source The New Palgrave Dictionary of Economics
Rejected Here
Why this is disputed. Austrian economists generally reject the liquidity-trap framing, attributing apparent monetary-policy ineffectiveness to prior malinvestment and interest-rate distortion rather than a genuine floor on demand for money.
Source The New Palgrave Dictionary of Economics
Associated With School
Source The General Theory of Employment, Interest and MoneyJohn Maynard Keynes
Attributed To
Keynes introduced the concept to explain why monetary policy alone failed to lift demand in a deep slump.
Source The General Theory of Employment, Interest and MoneyJohn Maynard Keynes
Sources
1. The New Palgrave Dictionary of Economics
Palgrave Macmillan- liquidity trap
- Associated With: Austrian School
- Associated With: Great Depression
- Associated With: 2008 Financial Crisis
2. The General Theory of Employment, Interest and Money
John Maynard Keynes, 1936Discussion of liquidity preference becoming absolute
There is the possibility...that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute...
Attributed To: John Maynard Keynes, Chapter 15
Keynes described the liquidity trap in The General Theory as the point at which further increases in the money supply fail to lower interest rates because the public prefers to hold cash rather than bonds.
Associated With School: Keynesian Economics, Chapter 15
Keynes described the liquidity trap in The General Theory, a foundational Keynesian concept.
3. Wikipedia
Wikimedia FoundationWikipedia, Liquidity trap, lead sectionQuote, Wikipedia, Liquidity trap, lead section
The Great Depression, the Great Recession and Japan's Lost Decades are examples of liquidity traps.
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