Biblioteca de la Universidad Complutense de Madrid

Some Reflections on the Theory of the “Liquidity Trap”


Palacio Vera, Alfonso (2009) Some Reflections on the Theory of the “Liquidity Trap”. [ Documentos de Trabajo de la Facultad de Ciencias Económicas y Empresariales; nº 02, 2009, ISSN: 2255-5471 ]

Vista previa
Creative Commons License
Esta obra está bajo una licencia de Creative Commons: Reconocimiento - No comercial - Compartir igual.


URL Oficial:


We provide a formal definition of the “liquidity trap” (LT) according to which, a LT arises if a combination of high precautionary saving, low investment and stringent conditions for access to bank credit stemming from a high degree of liquidity preference make the sum of the “neutral” interest rate and the expected inflation rate fall short of the term/risk premium on long-term interest rates. We then compare the “New Consensus” (NC) in macroeconomics as expounded in Woodford (2003) and the Post-Keynesian (PK) approach regarding the causes of a LT. We argue that in the NC approach a LT is a phenomenon caused by unusually large transitory shocks that depress the “neutral” interest rate temporarily. By contrast, we argue that in the PK approach an economy may also exhibit a “structural” or long-lasting LT even in the absence of large adverse shocks. Finally, we discuss a number of theoretical issues recently raised in the rapidly growing literature on the LT.

Tipo de documento:Documento de trabajo o Informe técnico
Información Adicional:

JEL Classification: B50, E12, E24, E50

Palabras clave:Neutral interest rate, Liquidity trap, Liquidity preference, Credit rationing.
Materias:Ciencias Sociales > Economía > Microeconomía
Título de serie o colección:Documentos de Trabajo de la Facultad de Ciencias Económicas y Empresariales
Código ID:8586

Arestis, P. and Sawyer, M.C. 2006. The Nature and Role of Monetary Policy when Money is Endogenous, Cambridge Journal of Economics, 30(6), pp. 847-60.

Arestis, P. and Sawyer, M.C. 2008. A critical reconsideration of the foundations of monetary policy in the new consensus macroeconomic framework, Cambridge Journal of Economics, 32(5), pp. 761-779.

Archibald, J. and L. Hunter 2001. What is the Neutral Real Interest Rate, and How Can We Use It?, Reserve Bank of New Zealand Bulletin, 64(3), pp. 15-28.

Auerbach, A.J. and Obstfeld, M. 2005. The Case for Open-Market Purchases in a Liquidity Trap, American Economic Review, March, 95(1), pp. 110-37.

Ball, L. 2008. Helicopter Drops and Japan´s Liquidity Trap, IMES Discussion Paper No. 2008-E-4.

Bernanke, B.S. and V. R. Reinhart 2004. Conducting Monetary Policy at Very Low Short-term Interest Rates, American Economic Review, Papers and Proceedings, 94(2), May, pp. 85-90.

Blinder, A.S. 2000. Monetary Policy at the Zero Lower Bound: Balancing the Risks, Journal of Money, Credit and Banking, 32(4), November, pp. 1093-1099.

Blinder, A.S. 2006. Monetary Policy Today: Sixteen Questions and about Twelve Answers, CEPS Working Paper No. 129, July.

Brunner, K. and Meltzer, A.H. 1963. The Place of Financial Intermediaries in the Transmission of Monetary Policy, American Economic Review, 53, May, pp. 372-82.

Brunner, K. and Meltzer, A.H. 1968. Liquidity Traps for Money, Bank Credit and Interest Rates, Journal of Political Economy, 76, January, pp. 1-37.

Bryant, R. C. (2000); ‘Comment on Overcoming the Zero Lower Bound on Interest Rate Policy’, Journal of Money, Credit and Banking, 32(4), Part 2, pp. 1036-50.

Buiter, W.H. (2003); ‘Deflation: Prevention and Cure’, National Bureau of Economic Research, Working Paper no. 9623, April.

Canzoneri, M. B., Cumby, R. Diba, B. and López-Salido, J.D. 2008. Monetary Aggregates and Liquidity in a Neo-Wicksellian Framework, CEPR, WP-6813, May.

Cargill, T., Hutchison, M. and Ito, T. 1997. The Political Economy of Japanese Monetary Policy, Cambridge (MA): MIT Press.

Carroll, C.D. 1992. The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence, Brookings Papers on Economic Activity, 2, pp. 61-156.

Carroll, C.D. 2001. A Theory of the Consumption Function, With and Without Liquidity Constraints, Journal of Economic Perspectives, 15(3), pp. 23-45.

Cassel, G. 1928. The Rate of Interest, the Bank Rate, and the Stabilization of Prices, Quarterly Journal of Economics, 42(4), August, pp. 511-529.

Clarida, R., J. Galí and M. Gertler 1999. The Science of Monetary Policy: A New Keynesian Perspective, Journal of Economic Literature, 37, December, pp. 1661-1707.

Clouse, J., Henderson, D., Orphanides, A., Small, D. and Tinsley, P. 2000. Monetary Policy When the Nominal Short-Term Interest Rate is Zero, Board of Governors of the Federal Reserve System, November.

Corrado, C. and Mattey, J. 1997. Capacity Utilization, Journal of Economic Perspectives, 11(1), Winter, pp. 151-67.

Cúrdia, V. and Woodford, M. 2008. Credit Frictions and Optimal Monetary Policy, October, mimeo.

Deaton, A. 1991. Saving and Liquidity Constraints, Econometrica, 59(5), pp. 1221-48.

Dymski, G. A. 1992. A “new view” of the role of banking firms in Keynesian monetary theory, Journal of Post Keynesian Economics, 14(3), pp. 311-320.

Eggertsson, G. B. and M. Woodford 2003. The Zero Bound on Interest Rates and Optimal Monetary Policy, Brookings Papers on Economic Activity, 1, pp. 139-233.

Freedman, C. 2000. Comment on Overcoming the Zero Lower Bound on Interest Rate Policy, Journal of Money, Credit and Banking, 32(4), November, pp. 1051-1057.

Friedman, M. and Meiselman, D. 1963. The Relative Stability of Monetary Velocity and the Investment Multiplier in the United States, 1897-1958, in Stabilization Policies, Commission on Money and Credit, pp. 165-268, Prentice-Hall, Englewood Cliffs, N.J.

Fuhrer, J.C. and Madigan, B. F. 1997. Monetary Policy When Interest Rates are Bounded at Zero, Review of Economics and Statistics, 79(4), November, pp. 573-585.

Garner, A. 1994. Capacity Utilization and U.S. Inflation, Federal Reserve Bank of Kansas City, Fourth Quarter, pp. 5-21.

Goodfriend, M. 2000. Overcoming the Zero Bound on Interest Rate Policy, Journal of Money, Credit and Banking, 32(2), November, pp. 1007-1035.

Goodhart, C.A.E. 2007. Whatever Became of the Monetary Aggregates?, National Institute Economic Review, April, issue 200, pp. 56-61.

Greenwald, B.C. and Stiglitz, J.E. 1993. New and Old Keynesians, Journal of Economic Perspectives, 7(1), Winter, pp. 23-44.

Harcourt, G. 1969. Some Cambridge Controversies in the Theory of Capital, Journal of Economic Literature, 7(2), pp. 369-405.

Hoshi, T. and Kashyap, A.K. 2004. Japan´s Financial Crisis and Economic Stagnation, Journal of Economic Perspectives, 18(1), pp. 3-26.

Hutchison, M. 2000. Japan´s Recession: Is the Liquidity Trap Back?, Federal Reserve Bank of San Francisco Economic Letter, 2000-19.

Ireland, P. 2001. Money´s role in the monetary business cycle, NBER Working Paper 8115.

Ito, T. and F.S. Mishkin 2004. Two decades of Japanese monetary policy and the deflation problem, National Bureau of Economic Research, Working Paper no. 10878, October.

Kaldor, N. 1939. Speculation and Economic Stability, Review of Economic Studies, 7(1), pp. 1-27.

Keynes, J. M. 1936. The General Theory of Employment, Interest and Money, Cambridge, Macmillan.

Koenig, E.F. 1990. Real money balances and the timing of consumption: an empirical investigation, Quarterly Journal of Economics, 105, pp. 399-425.

Kregel, J. 2004. Krugman on the Liquidity Trap: Why Inflation Will not Bring Recovery in Japan, in R. Arena and N. Salvadori (eds.) Money, credit and the role of the state: Essays in honour of Augusto Graziani, pp. 225-38, Aldershot (UK).

Krugman, P. 1998. It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap, Brookings Papers on Economic Activity, 2, pp. 137-205.

Lavoie, M. 1996. Horizontalism, Structuralism, Liquidity Preference and the Principle of Increasing Risk, Scottish Journal of Political Economy, 43(3), August, pp. 275-300.

Marglin, S.A. 1984. Growth, Distribution and Prices, Cambridge (MA): Harvard University Press.

McCallum, B.T. 2000. Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates, Journal of Money, Credit and Banking, 32(4), Part 2, November, pp. 870-904.

Meltzer, A. H. 2001. The Transmission Process, in Deutsche Bundesbank (ed.) The Monetary Transmission Process: Recent Developments and Lessons for Europe, pp. 112-130, London: Palgrave.

Meyer, L.H. 2001. Does Money Matter?, Federal Reserve Bank of St. Louis Review, September/October, pp. 1-15.

Modigliani, F. and Cao, L. 2004. The Chinese Saving Puzzle and the Life-Cycle Hypothesis, Journal of Economic Literature, 42(1), pp. 145-170.

Mussa, M. 2000. Reflections on Monetary Policy of Low inflation, Journal of Money, Credit and Banking, 32(4), November, pp. 1100-1106.

Myrdal, G. 1939. Monetary Equilibrium, London: W. Hodge.

Nakatani, T. and Skott, P. 2007. Japanese growth and stagnation: a Keynesian perspective, Structural Change and Economic Dynamics, 18(3), pp. 306-332.

Neal, P. 1996. Keynesian uncertainty in credit markets, Journal of Post Keynesian Economics, 18(3), pp. 397-418.

Nelson, E. 2002. Direct effects of base money on aggregate demand: theory and evidence, Journal of Monetary Economics, 49, pp. 687-708.

Orphanides, A. and Wieland, V. 2000. Inflation zone targeting, European Economic Review, 44, pp. 1351-1387.

Orphanides, A. 2004. Monetary policy in deflation: the liquidity trap in history and practice, North American Journal of Economics and Finance, 15, pp. 101-124.

Palacio-Vera, A. 2009. The “New Consensus” and the Post-Keynesian Approach to the Analysis of Liquidity Traps, Eastern Economic Journal, forthcoming.

Palley, T.I. 2000. The Case for Positive Low Inflation: Some Financial Market Considerations with Special Attention to the Problems of Japan, Eastern Economic Journal, 26(3), pp. 277-295.

Reifschneider, D. and Williams, J. C. 2000. Three Lessons for Monetary Policy in a LowInflation Era, Journal of Money, Credit and Banking, 32(4), November, pp. 936- 966.

Robertson, D.H. 1940. Mr Keynes and the Rate of Interest, in Essays in Monetary Theory, pp. 11-44. London: Staples Press. Reprinted 1966 in D.H. Robertson, Essays in Money and Interest, Selected by Sir John Hicks, pp. 150-187, London: Collins, Fontana Library.

Rowthorn, R. 1977. Conflict, inflation and Money, Cambridge Journal of Economics, 1, pp. 215-39.

Samwick, A.A. 1995. The Limited Off-set Between Pension Wealth and the Other Private Wealth: Implications of Buffer-Stock Saving, Manuscript, Department of Economics, Dartmouth College.

Sawyer, M.C. 1982. Collective Bargaining, Oligopoly and Macro-Economics, Oxford Economic Papers, 34(3), pp. 428-48.

Spence, A.M. 1977. Entry, Capacity, Investment and Oligopolistic Pricing, Bell Journal of Economics, 8(2), Autumn, pp. 534-44.

Stockhammer, E. 2008. Is the NAIRU Theory a Monetarist, New Keynesian, Post Keynesian or a Marxist Theory?, Metroeconomica, 59(3), pp. 479-510.

Summers, L. H. 1981. Capital Taxation and Accumulation in a Life Cycle Growth Model, American Economic Review, 71(4), pp. 533-44.

Svensson, L.E.O 2001. The Zero Bound in an Open-Economy: A Foolproof Way of Escaping from a Liquidity Trap, Monetary and Economic Studies 19 (S-1), February, Bank of Japan, 277-312.

Svensson, L.E.O. 2005. Monetary Policy and Japan´s Liquidity Trap, paper presented at the ESRI International Conference on Policy Options for Sustainable Economic Growth in Japan, Tokyo, September 14, 2005.

Taylor, J.B. 1993. Discretion Versus Policy Rules in Practice, Carnegie-Rochester Conference Series on Public Policy, 39, pp. 195-214.

Ueda, K. 2000. Japan’s Experience with Zero Interest Rates, Journal of Money, Credit and Banking, 32(4), November, pp. 1107-1109.

Wells, P. 1983. A post Keynesian view of liquidity preference and the demand for money, Journal of Post Keynesian Economics, Summer, 5(4), pp. 523-536.

Wicksell, K. 1936[1898]. Interest and Prices: a study of the causes regulating the value of money, London: Macmillan.

Wolfson, M. H. 1996. A Post Keynesian theory of credit rationing, Journal of Post Keynesian Economics, 18(6), pp. 443-470.

Woodford, M. 2003. Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton, NJ, Princeton University Press.

Wray, L.R. 1992. Commercial banks, the central bank, and endogenous money, Journal of Post Keynesian Economics, 14(3), Spring, pp. 297-310.

Yates, T. 2002. Monetary Policy and the Zero Bound to Interest Rates: A Review, Working Paper No. 190, October, European Central Bank.

Depositado:02 Mar 2009 16:00
Última Modificación:03 Dic 2015 13:01

Sólo personal del repositorio: página de control del artículo