Tag Archives: Liquidity trap

Notions of Liquidity Trap

On Fazit, Gerald Braunberger reviews the concept of “liquidity trap.”

  • Keynes never used the term but Robertson did.
  • Hicks introduced the common notion (represented, e.g., by a flat LM curve).
  • Krugman talks about a different trap. So does Blanchard and he (incorrectly) attributes it to Keynes. So does Sinn.

Liquidity Trap Kills Liquidity Effect

In his blog, John Cochrane registers disagreement with Larry Summers and reiterates his own argument that in a liquidity trap, interest rate policy does not have a liquidity effect and thus, only a long-run “expected inflation” or “Fisher” effect:

When the liquidity effect is absent, the expected inflation effect is all that remains. Inflation must follow interest rates.