Template-type: ReDIF-Paper 1.0
Author-Name: Alfonso Palacio Vera 
Author-Email: apv@ccee.ucm.es
Author-Workplace-Name: Departamento de Economía Aplicada III (Política Económica). Universidad Complutense de Madrid.
Author-Workplace-Homepage:
 https://www.ucm.es/deaeh
Title: Some Reflections on the Theory of the “Liquidity Trap”
Abstract: 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.
Classification-JEL: B50, E12, E24, E50
Keywords:
 Neutral interest rate, Liquidity trap, Liquidity preference, Credit rationing.
Length: 43 pages

Creation-Date: 2009 
Number: 09-02 
X-File-Ref: http://america.sim.ucm.es/repec/ucm/ref/doctra09-02.txt
File-URL: https://eprints.ucm.es/id/eprint/8586/1/0902.pdf
File-Format: Application/pdf
Handle: RePEc:ucm:doctra:09-02