A Note on Krugman’s Liquidity Trap and Monetary Policy at the Zero Lower Bound

Stefano Di Bucchianico

Review of Political Economy, 2020, vol. 32, issue 1, 99-120

Abstract: Krugman's ‘liquidity trap’ model constituted a ground-breaking contribution by attributing the long-lasting Japanese stagnation to a negative natural interest rate. Our critique to such a proposal will focus on three aspects. First, we will question the logical structure of the model, providing an alternative interpretation of its closure and arguing that aggregate demand has no crucial role in it. Second, we will argue that a negative natural interest rate can emerge only after a series of overtly restrictive assumptions in a model that does not treat capital and avoids long-run equilibrium analysis. Finally, we will discuss the mainstream literature which followed up until the recent rediscovery of the Secular Stagnation Theory. Within that line of literature, the key features of the ‘liquidity trap’ model continue to occupy a prominent role, thereby letting the critical issues that have been singled out resurface. Our conclusion is that the ‘liquidity trap’ explanation did not provide a satisfying rationale for Japan’s stagnation and cannot describe later economic predicaments either. A comparison with Post-Keynesian models shows their ability to offer insightful policy prescriptions without relying on those shaky theoretical foundations.

Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://hdl.handle.net/10.1080/09538259.2020.1731119 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:revpoe:v:32:y:2020:i:1:p:99-120

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/CRPE20

DOI: 10.1080/09538259.2020.1731119

Access Statistics for this article

Review of Political Economy is currently edited by Steve Pressman and Louis-Philippe Rochon

More articles in Review of Political Economy from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().