A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels.
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Famous quotes containing the word trap:
“We are not very much to blame for our bad marriages. We live amid hallucinations; and this especial trap is laid to trip our feet with, and all are tripped up first and last. But the mighty Mother who had been so sly with us, as if she felt that she owed us some indemnity, insinuates into the Pandora-box of marriage some deep and serious benefits, and some great joys.”
—Ralph Waldo Emerson (1803–1882)