Liquidity Traps for Money, Bank Credit, and Interest Rates

Karl H. Brunner · Allan H. Meltzer

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

Few conclusions about economic events have been repeated as frequently or have had as much influence on economists' attitudes toward monetary policy as the assertion that the monetary system of the thirties was "caught in a liquidity trap." Empirical studies of the public's demand for money and the banks' demand for earning assets seemed to support the assertion about a trap and the closely related conclusion that monetary policy had no effect on output, employment, and prices during at least some part of the thirties.1 Conclusions about the occurrence of a trap and the ineffectiveness of monetary policy were reinforced by central bankers' statements that likened monetary policy to "pushing on a string."2 Taken together the empirical evidence and the central bankers' interpretations convinced many economists that some form of a trap had existed (Keynes 1936 p. 207; Fellner, 1948, pp. 81-83, 91-93; Villard, 1948, pp. 324 334 345- Shaw, 1950, pp. 283-85)

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References

1936The General Theory of Employment, Interest and Money.1936The General Theory of Employment, Interest and Money, by John Maynard Keynes 2017A Monetary History of the United States, 1867-1960 1964A Monetary History of the United States, 1867-1960 1944Liquidity Preference and the Theory of Interest and Money 1950The Keynesian Revolution 1963The Demand for Money: The Evidence from the Time Series

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