Liquidity Trap
When interest rates are near zero and pumping in more money fails to boost spending, because people and…
In plain English
When interest rates are near zero and pumping in more money fails to boost spending, because people and businesses just hold onto cash.
The idea, associated with John Maynard Keynes, describes a stuck economy. Rates cannot go much lower, and extra money just sits idle because people are pessimistic or busy paying debts. Monetary policy loses its punch.
Japan in the 1990s and 2000s is the textbook case. Escaping a liquidity trap often needs government spending or unconventional policies like asset purchases.
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