Liquidity Trap
What is Liquidity Trap?
A situation where interest rates are so low that monetary policy loses its usual power to boost spending.
Understanding Liquidity Trap
When short-term interest rates hit or near zero, central banks cannot cut them much further, and people are content to hold extra money instead of spending or investing it.
Japan from the late 1990s and many advanced economies after 2008 faced this problem. Responses include quantitative easing, forward guidance and fiscal stimulus.