The Liquidity Trap, the Great Depression, and Unconventional Policy: Reading Keynes at the Zero Lower Bound

2014 ◽  
Author(s):  
Richard C. Sutch
Keyword(s):  
Lower Bound ◽  
Great Depression ◽  
Zero Lower Bound ◽  
Liquidity Trap ◽  
The Great Depression

READING KEYNES AT THE ZERO LOWER BOUND: THE GREAT DEPRESSION, THE LIQUIDITY TRAP, AND UNCONVENTIONAL POLICY

2018 ◽  
Vol 40 (3) ◽  
pp. 301-334 ◽  
Author(s):  
Richard Sutch
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
Interest Rates ◽  
Great Depression ◽  
Zero Lower Bound ◽  
Liquidity Trap ◽  
The Great Depression ◽  
Nominal Interest Rates

John Maynard Keynes’s analysis of the Great Depression has strong parallels to recent theorizing about the post-2008 Great Recession. There are also remarkable similarities between the two historical episodes: the collapse of demand for new fixed investment, the role of the zero lower bound liquidity trap in hampering conventional monetary policy, the multi-year period of near-zero short-term rates, and the protracted period of subnormal prosperity. A major difference between then and now is that monetary authorities in the recent situation actively pursued an unconventional policy with massive purchases of long-term securities. Keynes couldn’t convince authorities of his era to pursue such a plan, but it was precisely the monetary policy he advocated for a depressed economy stuck at the zero lower bound of nominal interest rates.

scholarly journals Journal of the History of Economic Thought Preprints - READING KEYNES AT THE ZERO LOWER BOUND: THE GREAT DEPRESSION, THE LIQUIDITY TRAP, AND UNCONVENTIONAL POLICY

2018 ◽  
Author(s):  
Richard Sutch
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
Interest Rates ◽  
Great Depression ◽  
Economic Thought ◽  
Zero Lower Bound ◽  
Liquidity Trap ◽  
The Great Depression ◽  
Nominal Interest Rates ◽  
History Of

John Maynard Keynes’s analysis of the Great Depression has strong parallels to recent theorizing about the post-2008 Great Recession. There are also remarkable similarities between the two historical episodes: the collapse of demand for new fixed investment, the role of the zero-lower-bound liquidity trap in hampering conventional monetary policy, the multi-year period of near-zero short-term rates, and the protracted period of subnormal prosperity. A major difference between then and now that monetary authorities in the recent situation actively pursued an unconventional policy with massive purchases of long-term securities. Keynes couldn’t convince authorities of his era to pursue such a plan, but it was precisely the monetary policy he advocated for a depressed economy stuck at the zero lower bound of nominal interest rates.

Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach*

2012 ◽  
Vol 127 (3) ◽  
pp. 1469-1513 ◽  
Author(s):  
Gauti B. Eggertsson ◽  
Paul Krugman
Keyword(s):  
Fiscal Policy ◽  
Great Depression ◽  
Aggregate Demand ◽  
New Keynesian ◽  
Liquidity Trap ◽  
The Great Depression ◽  
Lost Decade ◽  
Debt Deflation

Abstract In this article we present a simple new Keynesian–style model of debt-driven slumps—that is, situations in which an overhang of debt on the part of some agents, who are forced into rapid deleveraging, is depressing aggregate demand. Making some agents debt-constrained is a surprisingly powerful assumption. Fisherian debt deflation, the possibility of a liquidity trap, the paradox of thrift and toil, a Keynesian-type multiplier, and a rationale for expansionary fiscal policy all emerge naturally from the model. We argue that this approach sheds considerable light both on current economic difficulties and on historical episodes, including Japan’s lost decade (now in its 18th year) and the Great Depression itself.

scholarly journals Leverage and the Financial Accelerator in a Liquidity Trap

2011 ◽  
Vol 101 (3) ◽  
pp. 413-416 ◽  
Author(s):  
Karel Mertens ◽  
Morten O Ravn
Keyword(s):  
Lower Bound ◽  
House Price ◽  
Financial Accelerator ◽  
Price Model ◽  
Financial Friction ◽  
Liquidity Trap ◽  
Collateral Constraint ◽  
The Great Depression ◽  
Output Losses ◽  
Large Output

We show that the financial accelerator may be very large in a liquidity trap. We study a sticky price model with real estate and a financial friction specified as a collateral constraint. Expectations can lead the economy to a self-fulfilling liquidity trap equilibrium where the lower bound on the nominal interest rate binds. We model these equilibria as stochastic sunspots. As in the Great Depression, a liquidity trap entails house price depreciation and potentially large output losses. Higher leverage implies much larger output losses but at the same time rules out the existence of short-lived liquidity traps.

scholarly journals Transmission mechanism of the Federal Reserve System’s monetary policy in the conditions of zero bound on nominal interest rates

Equilibrium ◽  
2016 ◽  
Vol 11 (4) ◽  
pp. 751 ◽  
Author(s):  
Dominika Brózda
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
Interest Rates ◽  
Federal Reserve ◽  
Global Financial Crisis ◽  
Transmission Mechanism ◽  
Zero Lower Bound ◽  
Liquidity Trap ◽  
Scientific Discussion ◽  
Nominal Interest Rates

The experience of Japan from the 90s of the twentieth century and the recent global financial crisis has shown that the zero lower bound problem has ceased to be a theoretical curiosity and became the subject of intense scientific discussion. This issue is closely linked with John Maynard Keynes’s liquidity trap. The phenomenon of the zero lower bound is very controversial. Not all economists agree that it may restrict the effectiveness of the central bank’s actions. The aim of the article is to present the views of economists on this transmission mechanism of monetary policy under the zero lower bound. The paper also attempts to evaluate the effectiveness of the Federal Reserve System’s monetary policy at zero nominal interest rates.

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