Liquidity trap
As liquidity trap refers to the situation of an economy in which official interest rates have fallen so far from zero that the conventional monetary policy fails.
The phenomenon that money is no longer offered when interest rates decline for investment and thus the economic cycle is removed tends, was described by the economist John Maynard Keynes.
More fundamentally related
Immediately available liquid ( most liquid ) money that is not yet money capital in this state, has a distinct advantage over the long term invested assets and over the goods a priori. Liquides money provides the ability to be immediately available both for purchase and for investment. At any time willingness to pay and thus act more quickly - even over a longer period of time - can the money-holders but wait for " much better " or at least " better alternatives ".
Described, the liquid money immanent " liquidity advantage" over the goods identified John Maynard Keynes as the cause of the " liquidity premium of money". This advantage can be quantified by Keynes at about 3 percent. Thus would be easy money generally only in the financial market as credit available and could thus become money capital when the expected money for interest exceeds this liquidity advantage of about 3%, or at least compensate him.
As a result of the " liquidity premium of money" would be made available for investment whose return is below this "iron limit" of about 3%, no money. Such investments would thus not be made. This applies to investment in physical capital as well as for systems in the credit market. Since the investments expected in return on real capital ( the "Property Interest " or " real capital interest " ) with increasing physical capital, ie growing equipment with means of production, steadily decreases, often remained important long-term investment. Easy money ( assets) ( liquidity) is the economic cycle then amplified only available at short notice. It would - stockpiled - as a result of the expectation of the liquidity premium. The medium of exchange money - for the Physiocrats François Quesnay a "means of transport " in the business " bloodstream " - is for ( the economic cycle withdrawn ) " liquid" treasure resources, is thus in reality " illiquid " Increasingly missing the economic cycle the necessary long -term financing ( credit crunch ). .
The incoming due to improved physical capital equipment decrease the yield of physical capital ( "Property Interest " ) to less than three percent leads to Keynes in the " liquidity trap ": money remains increasingly liquid, is the economic cycle only available at short notice. The result is a structural gap in demand and long-term deflation, coupled with deferred underemployment and unemployment. There are so virulent crises, the increasing government intervention in the economic life cause. Often this takes the form of repeated enormous " capital injections " and rate cuts by the central bank, which in turn caused latent threat of inflation at the same time increasing the risk of deflation - a " dance on the razor's edge ." Hand in hand with growing state regulation readiness.
The continued flow of liquidity premium can lead to enormous "wealth redistribution " according to Keynes.
If traders expect a rising interest rate, they buy any additional interest-bearing securities because their value would fall when interest rates rise and the risk of loss in value as there is no prospect of increase in value as a result of again falling lending rates. Therefore money is spent neither for securities or for commodities. It is the economic cycle withdrawn in speculative and held in speculation checkout, so disappears in a liquidity trap. Connected with this is the risk of deflation.
The critical rate is the so-called Strike - interest, which is not reached, because the economic agents no longer invest despite the increase in their money holdings in interest-bearing securities. The monetary policy of the central bank as a means of demand stimulation is ineffective because even with further declines in interest rates, the demand for securities not increase. In this situation the government to stimulate the economy needs to be active, for example by an expansionary fiscal policy. Such a situation can occur if the interest rate is close to or exactly zero. An increase in expenditure of the state due to a liquidity trap signifies that the state is forced economic side to invest in order to prevent deflation.
Liquidity trap and effectiveness of monetary policy
The statement that monetary policy is ineffective in a liquidity trap, of course, is true only for an expansionary monetary policy. For a sufficiently large amount of money reduction but it is possible that the economic agents in order to continue to provide liquidity to remain through the resulting excess demand in the money market to sell a part of its securities because by assumption an excess demand (ie more demand than supply ) on the money market with excess supply (ie more supply than demand ) on the securities market corresponds ( cf. Walras law).
Falling prices pull However, the theory, an increase in interest rates by itself. Such a policy is only likely to increase the interest rate level, ie to leave the liquidity trap. The aggregate income goes back (with interest- elastic investment demand ), because now fewer investments are worthwhile.
In addition to the investment case and downwardly inflexible wages can be seen in underemployment here the cause of the equilibrium described by Keynes.
Keynes assumed that money is an incorruptible good and that there can be no such thing as a negative interest rate. In an economic system, however, in which investors keep their money at a loss in speculation checkout, it therefore the economic cycle could not escape without drawbacks, there would be no liquidity trap.
Colloquially, the term liquidity trap is used to describe the phenomenon that companies not get loans despite economic health.