The term „liquidity trap" was suggested by Keynes (1936) as a situation in which monetary policy is unable to stimulate an economy through increasing money supply or lowering interest rates. Liquidity traps typically occur when deflation is expected.
Under the Keynesian conception of a liquidity trap further injections into the money supply fail to stimulate the economy. Keynesians claim, that if an economy enters into a liquidity trap, increases in the money stock and reductions in interest rates
will fail to provide a stimulative effect to the economy............
Miloslav HOSCHEK PhD
© Finextra Research 2014