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Liquidity Trap: Definition & The risk in the monetary policy

Liquidity Trap: Definition & The risk in the monetary policy

Liquidity trap is a phenomenon that occurs when the monetary policy of an economy loses its ability to promote and incentive production. This is because the economy’ s interest rates have already stayed at a very low level, making citizens just want to keep their cash in hand, without any intention for savings or investment purposes; therefore, the Central Bank loses its economic regulatory tool. This leads to the result that even though interest rates are lowered, economic activities recover sluggishly, and that country is said to step in the liquidity trap.