Concepts
Liquidity Trap
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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. Cross-Tradition Connections
Associated With
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.
Associated With School
Attributed To
Keynes introduced the concept to explain why monetary policy alone failed to lift demand in a deep slump.
Sources
1. The New Palgrave Dictionary of Economics
Palgrave Macmillanliquidity trap
1. The New Palgrave Dictionary of Economics
Palgrave MacmillanAssociated With: Austrian School
1. The New Palgrave Dictionary of Economics
Palgrave MacmillanAssociated With: Great Depression
1. The New Palgrave Dictionary of Economics
Palgrave MacmillanAssociated With: 2008 Financial Crisis
2. The General Theory of Employment, Interest and Money
John Maynard Keynes, 1936Discussion of liquidity preference becoming absoluteQuote, Discussion 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...
2. The General Theory of Employment, Interest and Money
John Maynard Keynes, 1936Attributed To: John Maynard Keynes, Chapter 15Quote, 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.
2. The General Theory of Employment, Interest and Money
John Maynard Keynes, 1936Associated With School: Keynesian Economics, Chapter 15Quote, Associated With School: Keynesian Economics, Chapter 15
Keynes described the liquidity trap in The General Theory, a foundational Keynesian concept.
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