• Table of Contents
    • Abstract
    • Keywords
    • Article
      • The modern view of the liquidity trap
      • Irrelevance results
      • The deflation bias and the optimal commitment
      • Shaping expectations
      • Conclusion: the Great Depression and the liquidity trap
    • See Also
    • Bibliography
    • How to cite this article

liquidity trap

Gauti B. Eggertsson
From The New Palgrave Dictionary of Economics, Second Edition, 2008
Edited by Steven N. Durlauf and Lawrence E. Blume
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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.
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How to cite this article

Eggertsson, Gauti B. "liquidity trap." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 17 January 2018 <http://www.dictionaryofeconomics.com/article?id=pde2008_L000237> doi:10.1057/9780230226203.0981

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