2018/01/01 by Gauti B. Eggertsson · 1 citation
Economics, Econometrics and Finance · #Economic Theory and Policy #Economic theories and models #Economics #Interest rate #Keynesian economics #Liquidity crisis #Liquidity trap #Market liquidity #Monetary Policy and Economic Impact #Monetary economics #Monetary policy #Money supply #Open market operation #Trap (plumbing)
paper · doi:10.1057/978-1-349-95189-5_2482
openalex publication_date 2018/01/01 · openalex created_date 2022/05/12 · openalex updated_date 2026/07/14
A liquidity trap is defined as a situation in which the short-term nominal interest rate is zero. The old Keynesian literature emphasized that increasing money supply has no effect in a liquidity trap so that monetary policy is ineffective. The modern literature, in contrast, emphasizes that, even if increasing the current money supply has no effect, monetary policy is far from ineffective at zero interest rates. What is important, however, is not the current money supply but managing expectations about the future money supply in states of the world in which interest rates are positive.