Liquidity Trap

Definition: The Liquidity trap is a Keynesian idea. When expected returns from investments in securities or real plant and equipment are low, investment falls, a recession begins, and cash holdings in banks rise. People and businesses then continue to hold cash because they expect spending and investment to be low. This is a self-fulfilling trap.

See also: Keynes Effect and Pigou Effect.

Terms related to Liquidity Trap:

• Keynes Effect
• Pigou Effect
• Liquidity

About.Com Resources on Liquidity Trap:

• What Happens if Interest Rates Go To Zero?
• The Growing Importance of Monetary Policy
• Banks

Writing a Term Paper? Here are a few starting points for research on Liquidity Trap:

Journal Articles on Liquidity Trap:

• It's Baaack: Japan's Slump and the Return of the Liquidity Trap
• The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap
• Thinking About the Liquidity Trap