Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
It's what MIT school economists call it when you hit the zero bound of nominal interest rates. Since MIT school economists subscribe to the loanable funds fallacy, they believe that the central bank lowers interest rates by creating more liquidity, rather than creating more liquidity in consequence of its decision to lower interest rates.

The "liquidity trap," then, is the point where no amount of additional liquidity can reduce borrowing costs.

It's got nothing to do with liquidity, and it's not a trap. It's an operational constraint on the use of interest rate policy in macroeconomic planning. And it should not come as a surprise to anybody, but it repeatedly does, because neoclassical economists have an unhealthy infatuation with irrationally excluding discretionary fiscal and industrial policy from the realm of macroeconomic planning.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Mar 18th, 2012 at 01:50:24 PM EST
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