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Topic: Liquidity trap

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	Thinking about the liquidity trap
		I started with a preconception: that the idea of the liquidity trap was basically a red herring, that surely a determined central bank could always reflate the economy.
		I thought it would show that the liquidity trap was not a real issue, that without the inconsistencies of the IS-LM model it would become clear that it could not really happen.
		But the liquidity trap, at least in the version I take seriously, is not a permanent state of affairs.
	web.mit.edu /krugman/www/trioshrt.html (6014 words)

	Shut Your Liquidity Trap! (Site not responding. Last check: 2007-10-13)
		The column is about two economic concepts: deflation, and the "liquidity trap." As you might expect, Krugman tries to make it seem that these two concepts are coming together in an imminent cataclysmic catastrophe (and only he and a few other really smart people see the looming danger).
		The liquidity trap describes a failure of the Keynesian theory of the role of the central bank.
		There will not be any liquidity trap, but instead a gentle [if Greenspan and the boys are on their game] but persistent lowering of wages and prices over term until equilibrium is reached.
	www.freerepublic.com /focus/f-news/918838/posts (2972 words)

	THINKING ABOUT THE LIQUIDITY TRAP - Paul Krugman
		In a liquidity trap monetary policy does not work because the markets expect the bank to revert as soon as possible to the normal practice of stabilizing prices; to make it effective, the central bank must credibly promise to be irresponsible, to maintain its expansion after the recession is past.
		Of course the whole world could find itself in a liquidity trap (assuming some answer is found to the first challenge), but that is manifestly not the case at present.
		It is in a fundamental sense a multiple equilibrium story, with the liquidity trap corresponding to the low-level equilibrium.
	www.geocities.com /ecocorner/intelarea/pk2.html (6020 words)

	Donald Luskin on Paul Krugman and Deflation on NRO Financial
		The liquidity trap actually describes a failure of the Keynesian theory of the role of the central bank.
		So, evidence of the orthodoxy's failure is given a technical name — the liquidity trap — and itself becomes a part of the orthodoxy in a new, more elaborate version, one that's intensely studied by cultists like Krugman with even more single-minded solemnity than the original.
		Gitlitz correctly argues that the liquidity trap "is akin to an urban legend," and that deflation is nothing to be especially feared just because interest rates are near zero.
	www.nationalreview.com /nrof_luskin/truthsquad052803.asp (1432 words)

	Liquidity Trap or Liquidity Rally?
		If there is growth in financial system liquidity, which is defined as a measure of transactions demand for money, in excess of nominal GDP growth, then this excess money has to go somewhere; that is, deposits, fixed income instruments or equities.
		Indeed, the potential pool of liquidity for Asia through this route, absent credit demand and given flush liquidity conditions, Asia appears to be caught in a classic liquidity trap for now.
		The additional liquidity being provided by Asian policy makers is winding up in risk-averse assets such as dollar-denominated sovereign bonds (where buyers have been predominantly Asian banks and insurance companies).
	www.bradynet.com /bbs/asia/100052-0.html (2556 words)

	Paul Krugman’s lousy economic thinking
		The first thing about the Keynesian liquidity trap that should strike anyone conversant with Keynesian thinking is that it completely reverses the Keynesian explanation of what determines the interest rate.
		But the liquidity trap clearly assumes that the demand to hold money is determined by the rate of interest, meaning that this demand should vary inversely with changes in the rate of interest.
		That the fictitious liquidity trap had to be conjured up as an alternative explanation because Keynesian pump priming failed is the kind of heretical thinking that this Keynesian cultist evidently cannot tolerate.
	www.brookesnews.com /060602krugman.html (1194 words)

	NBER Research Summary
		Japan decade-long experience of deflation and a liquidity trap has stimulated research on how to escape from such a trap.
		In a liquidity trap, the central bank's "instrument rate" - a short nominal interest rate, such as the federal funds rate in the United States is zero and the zero lower bound is binding, in the sense that deflation and/or recession calls for a more expansionary policy and a lower real interest rate.
		It belongs among the contingency plans that prudent central banks may want to prepare for the worst-case scenario of falling into a liquidity trap and risking a spiral of deflation and depression.
	www.nber.org /reporter/winter03/traps.html (3411 words)

	EconLog, Liquidity Trap, II, Arnold Kling: Library of Economics and Liberty
		The comments on the Liquidity Trap or Statism Trap thread have been interesting.
		It is a long, interesting piece, and it deals with a number of issues that were new to me. Mostly, these have to do with the theoretical difficulty of building a model that generates the liquidity trap using "modern" macroeconomic concepts, such as expectations and international capital mobility.
		To me, the liquidity trap ultimately seems to rely on the textbook simplification of a single interest rate.
	econlog.econlib.org /archives/2003/05/liquidity_trap_1.html (648 words)

	The Unofficial Paul Krugman Web Page
		And for a long time macroeconomists kept the liquidity trap in mind as an important theoretical possibility, if not something one was likely to encounter in practice.
		A liquidity trap can happen in a very simple economy - one in which there is no investment, and therefore no way for consumers in the aggregate to make tradeoffs between present and future.
		Fiscal policy: The classic Keynesian view of the liquidity trap is, of course, that it demonstrates that under some circumstances monetary policy is impotent, and that in such cases fiscal pump-priming is the only answer.
	www.pkarchive.org /japan/japtrap.html (5770 words)

	July 13, 1999; Trapped in a Liquidity Trap
		Keynes, of course, was forced to develop the idea of a "liquidity trap" to explain why his other theories were not working in practice.
		The "liquidity trap" was the idea that held Keynesians together until World War II, when the government ran enormous deficits to buy things that were destroyed so rapidly after they were detonated or crashed or hit by enemy fire, that they had to be replaced.
		In recent years, Keynesians changed their name to neo-Keynesians, because they observed that people were spending faster than they were saving, and we had the opposite of a liquidity trap (which they stopped talking about, except in hushed tones when you were around with a notebook).
	www.polyconomics.com /searchbase/07-13-99.html (1119 words)

	Liquidity preference - Wikipedia, the free encyclopedia
		Then people will try to shift their assets out of the less liquid accounts into liquid money accounts as long as the rate of interest is less than Ra, or in reverse, to buy nonliquid assets whenever the rate of interest is greater than Ra.
		Rt is called "liquidity trap." Some economists have questioned the possibility of a "liquidity trap;" but others observe that the Japanese economic system, in the late 1990s, behaved very much like it was at the "liquidity trap" interest rate level.
		The Fed can use the liquidity preference relationship to influence interest rates only to the extent that the relationship is stable, or at least predictable.
	en.wikipedia.org /wiki/Liquidity_preference (607 words)

	FRBSF: Economic Letter - Japan's Recession: Is the Liquidity Trap Back? (06/16/2000)
		One explanation, put forward by Paul Krugman (1998a, b), is that traditional monetary policy instruments are powerless to provide effective stimulus to the economy because Japan is in a "liquidity trap." This Economic Letter evaluates the liquidity trap argument against a leading alternative explanation: a credit crunch associated with Japan's banking problems.
		Japan is the first major industrial economy to face serious deflation since the 1930s, and, not surprisingly, that also was the time that the liquidity trap explanation for the ineffectiveness of monetary policy was popularized.
		A liquidity trap is characterized by a situation--similar to Japan today--where interest rates are at or near zero.
	www.frbsf.org /econrsrch/wklyltr/2000/el2000-19.html (1562 words)

	Financial Sense Online Market WrapUp with Jim Willie CB for 06/21/1004
		Sadly, the liquidity trap is not well understood any more than inflation, but only in the real economy.
		It is my contention that the US Economy will back into an interest rate trap, by focusing on the weakness of the real economy, while allowing continued extravagance with monetary expansion in outright subsidies to the financial sector.
		However, equity extraction is a trap and evidence of liquidation.
	www.financialsense.com /Market/willie/2004/0621.html (4000 words)

	ArgMax Economics Weblog: Liquidity Trap
		In a liquidity trap, however, people are willing to part easily with their bonds, since they pay little or no interest and are hence roughly equivalent to holding cash; and so only a very small change in price is needed to buy the bonds - even if the Fed is buying lots of them.
		In short, the economy will be in a liquidity trap if/when the Federal Reserve cannot boost the economy because they have lowered interest rates as much as they can.
		The liquidity trap is more than just a theoretical possibility; some have suggested that this may be what happened in Japan in the mid 1990's (although there are different views on the topic).
	www.argmax.com /mt_blog/archive/000350.php (1575 words)

	The Unofficial Paul Krugman Web Page
		As the I.M.F. report explains, the most important reason to fear deflation is that it can push an economy into a liquidity trap, or deepen the distress of an economy already caught in the trap.
		And when an economy is in a liquidity trap, the authorities can't offset the depressing effects of deflation by cutting interest rates.
		By 1995 or so the economy had slid into a liquidity trap; by the late 1990's it had entered into a deflationary spiral.
	www.pkarchive.org /column/052403.html (1523 words)

	EconLog, Liquidity Trap or Statism Trap?, Arnold Kling: Library of Economics and Liberty
		In this essay, I take issue with Paul Krugman's claim that the liquidity trap is relevant to Japan and the United States.
		He thinks that the bank bailouts are a good thing, that Japan's problem is a "liquidity trap," and that the U.S. also could fall into a liquidity trap.
		Therefore, the only interest rate relevant to the liquidity trap question is the rate of interest payable on assets which are near-substitutes for money, for which the rate on overnight bank deposits should proxy decently.
	econlog.econlib.org /archives/2003/05/liquidity_trap.html (3039 words)

	Monetary Policy and Japan's Liquidity Trap - Abstract (Site not responding. Last check: 2007-10-13)
		But the problem in a liquidity trap (when the zero lower bound on the central bank’s instrument rate is strictly binding) is rather to raise private-sector expectations of the future price level.
		Increased expectations of a higher future price level are likely to be much more effective in reducing the real interest rate and stimulating the economy out of a liquidity trap than a further reduction of already very low expectations of future interest rates.
		Therefore, monetary-policy alternatives in a liquidity trap should be assessed according to how effective they are likely to be in affecting private-sector expectations of the future price level.
	www.princeton.edu /~svensson/papers/Tokyo509abs.htm (296 words)

	FRBB Research Review- The Liquidity Trap, the Real Balance Effect, and the Friedman Rule
		Krugman and Svensson have separately reconsidered the idea of the liquidity trap, using state-of-the-art monetary models in which optimizing agents have rational expectations.
		Absent from these new models of the liquidity trap is the idea of the real balance effect, whereby a change in real balances impacts household wealth and thus affects consumption and output, enabling the central bank to influence the economy even after the nominal interest rate hits its lower bound.
		Paradoxically, a zero nominal interest rate is something to be achieved in the models in which the liquidity trap survives; with the introduction of the real balance effect, a zero nominal interest rate becomes something to be avoided.
	www.bos.frb.org /economic/researchreview/issue3/issue3d.htm (457 words)

	SSRN-The Liquidity Trap and Persistent Unemployment with Dynamic Optimizing Agents: Empirical Evidence by Yoshiyasu ...
		Standard money-in-utility dynamic models assume satiable liquidity preference, and thereby prove the existence of a full-employment steady state.
		In the same framework, it is known that under insatiable liquidity or wealth preference there is a case where a full-employment steady state does not exist.
		A liquidity trap then arises and unemployment persists in the steady state.
	papers.ssrn.com /sol3/papers.cfm?abstract_id=625424 (294 words)

	Liquidity Traps Taxing currency as a way out of a liquidity trap
		The authors, Willem Buiter, of the Bank of England’s Monetary Policy Committee and Cambridge University, and Nikolaos Panigirtzoglou of the Bank of England, take the present situation in Japan as their starting point and examine whether there is any possibility of the same phenomenon appearing in Britain.
		If a liquidity trap is to be avoided action has to be taken early to avoid hitting what the authors call ‘the zero interest floor’.
		It is evident also that there are high costs associated with this system: people would have to queue up to have their money stamped, and the threat of confiscation would have to be credible.
	www.cepr.org /press/dp2203.htm (702 words)

	Sep 12, 2006 The Liquidity Trap Captain Hook 321gold..... Inc
		Below is an excerpt from a study that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, September 5th, 2006.
		In this respect it should be understood higher precious metals prices are expected no matter what interest rates do, it's just that the bubble's ultimate size will likely grow bigger the longer general liquidity conditions remain in tact.
		Therefore, reproduction, modification, storage in a retrieval system or retransmission, in any form or by any means, electronic, mechanical or otherwise, for reasons other than personal use, is strictly prohibited without prior written permission.
	www.321gold.com /editorials/captainhook/captainhook091206.html (1420 words)

	Japanese economy - liquidity trap
		It has taken Japanese economic stagnation to resurrect the concept of the liquidity trap, another of Keynes’ fallacies.
		In an address to a conference at the London School of Economics, Professor Charles Goodhart claimed that the Japanese economy provided evidence for the existence of the liquidity trap.
		When the boom finally came to an end Japan made the mistake of not allowing the malinvestments to be liquidated, causing the economy to stagnate.
	www.brookesnews.com /052103japan.html (952 words)

	The Liquidity-Trap Myth
		The liquidity trap would occur if the LM curve of the IS-LM framework is horizontal, making any government intervention in the money market futile.
		Thus, when some commentators put forward the liquidity trap as an explanation of the Japanese problems from 1990 onward, they are implicitly assuming that there is a negative relation between the rate of profit and investment.
		According to Krugman (1998a, 2001 and 2003), the problem is too little spending regardless of what kind, so that the spending in connection to the destruction of skyscrapers or even war is good for the economy.
	www.bradynet.com /bbs/nonem/100116-0.html (1309 words)

	The Liquidity-Trap Myth - Mises Institute
		Although the trap itself follows from the J.R. Hicks IS-LM analysis, the basic idea is borrowed from J.M. Keynes.
		The evidence is conclusive—Japan hasn't been caught in a liquidity trap.
		Moreover, since the relation has been positive rather than negative in what is believed to be the schoolbook example of a liquidity trap, clearly refuting the trap idea itself, the evidence should end all discussion about the risk the trap could spread to the U.S. and elsewhere.
	www.mises.org /fullstory.asp?control=1226 (1586 words)

	Notes: Last Macro Class: Liquidity Trap: Archive Entry From Brad DeLong's Webjournal
		It's not that I hadn't heard the argument before--this is the third time I've read Paul's stuff on liquidity traps, after all.
		I mean, in a world where the private sector is huge and tends to make offsetting shifts in its portfolio, the central bank is helpless regardless of the level of interest rates or inflation.
		On second thoughts, thanks a ton to the person who explains Paul Krugman's musings on liquidity trap to not-yet-economists, as I prefer to be called.
	www.j-bradford-delong.net /movable_type/2003_archives/001468.html (1486 words)

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