特集論文 The Curious Case of the Liquidity Trap

type:Departmental Bulletin Paper

The long post-1990 economic stagnation in Japan and the post-2007 global financial crisis have rekindled fears that have lain dormant since the Great Depression of the 1930s. Confidence in mac roeconomic theory and management has been badly shaken. With interest rates at or near zero, the ability of conventional monetary policy to influence the real economy is increasingly being questioned.In desperation, central banks around the worldhave resorted to unconventional monetary policies such as open market purchases of private financial assets. The culprit widely thought tobe behind these difficulties is an old and oncediscredited concept called the liquidity trap. Inthe conventional interpretation, the liquidity trap occurs when the long-term interest ratereaches an irreducible minimum and marketparticipants eschew interest-sensitive assets forhighly liquid financial assets. Since the demandfor liquidity becomes extremely large, increasesin the real supply of money are simply held anddo not enter the spending stream. In contrast, the modern view associates the liquidity trapwith a situation where the short-term nominalinterest rate is zero and the long-term real interest rate consistent with full employment isnegative. At the “zero bound,” money andshort-term assets become near-perfect substitutes and the demand for moneyis indeterminate. Increases in the real supply of money are held as liquid assets and not spent. This paper compares and contrasts the old and new versions of the liquidity trap as well as their differences with the original concept of Keynes (1936). Finding shortcomings in both interpretations, a new theory is proposed. Following Keynes (1936, 1937), the liquidity sump theory argues that fundamental uncertainty concerning future income streams results in a flight from tangible assets to highly liquid and safe financial assets. A decline in tangible asset demand is matched by an increase in the demand for liquid assets. Both monetary and fiscal policy is ineffectual in a liquidity sump. Any policy-induced increase in income is absorbed by an offsetting rise in liquidity demand. In the liquidity sump, there is no free lunch for macroeconomic policy makers. Recovery depends on restoring confidence in the future productivity of the economy.

identifier:彦根論叢, 第387号, pp. 8-21

identifier:The Hikone Ronso, No.387, pp. 8-21