Liquidity trap

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Liquidity trap - a term introduced by D. H. Robertson describing the situation when everyone strives to have cash and no one buys securities (infinite demand for money). It occurs at such a low, critical rate at which it is not expected to fall further. In general, it is expected to increase and thus fall in market prices of bonds. This, in turn, favors keeping money at the highest level. It is not profitable to maintain income in the form of bonds, as losses are expected to fall due to their market value. This situation is characterized by the disappearance of the central bank's influence on the level of investment and consumer demand. Increasing the central bank's money supply does not result in a lower interest rate, but rather a thesis of surplus money by business entities. The only way to increase investment and private sector production is to increase budget spending, which directly triggers multiplier processes.

The liquidity trap is one of the reasons for the asymmetry of monetary policy effects, ie that the effectiveness of the policy is greater in the case of restrictive measures than in the exercise of economic activity. This is due to the fact that there is a certain "lower limit" of nominal interest rates, while there is no "upper limit" for its growth. Bibliography

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