Falling into the liquidity trap: Notes on the global economic crisis by Thomas R. Michl This paper examines the underlying structural imbalances leading up to the Great Recession of 2007-2009 from the vantage point of Hyman Minsky’s theory of the liquidity trap. The traditional approach to the liquidity trap focuses on the zero interest rate boundary while Minsky’s theory focuses on three condi...

During the long economic slump in Japan, monetary policy in Japan has essentially consisted of a very low interest rate (since 1995), a zero interest rate (since 1999), and quantitative easing (since 2001). The intention seems to have been to lower expectations of future interest rates. But the problem in a liquidity trap (when the zero lower bound on the central bank's instrument rate is stric...

We prove the existence of monetary equilibrium in a finite horizon economy with production. We also show that if agents expect the monetary authority to significantly decrease the supply of bank money available for short-term loans in the future, then the economy will fall into a liquidity trap today.

This paper analyzes the effect of endogenous unemployment risk on the dynamics of recovery from a liquidity trap. In a liquidity trap, an adverse demand shock raises unemployment and produces a period of slow hiring. Slow hiring further reduces demand, both for standard precautionary reasons and because credit conditions endogenously worsen, reducing households’ ability to borrow and consume. T...

In the early years of macroeconomics as a discipline, the liquidity trap-that awkward condition in which monetary policy loses its grip because the nominal interest rate is essentially zero, in which the quantity of money becomes irrelevant because money and bonds are essentially perfect substitutes-played a central role. Hicks (1937), in introducing both the IS-LM model and the liquidity trap,...