A Monetary Policy Rule for Automatic Prevention of a Liquidity Trap

Among monetary economists, a major topic of interest during recent years has been the possibility of a liquidity trap, i.e., a situation in which monetary policy stimulus cannot be obtained by the usual method of lowering the setting of the central bank’s interest rate instrument because that rate is at its lower bound of zero. It would be better, I suggest, to use the term “zero lower bound situation,” rather than “liquidity trap,” since the latter seems to imply a priori that there is no available mechanism for generating monetary policy stimulus.