A Neglected Route to Krugman’s Liquidity Trap Revival

CSWP 43 (July 2020)

Author Stefano Di Bucchianico

Keywords three causes for a positive rate of interest; liquidity trap; negative natural rate of interest; Krugman; Samuelson.

JEL B13; B20; B30.

Krugman’s 1998 seminal model that revived the liquidity trap theory stimulated a debate on its origins in and differences with respect to Keynes and Hicks’s insights. The present paper illustrates and comments on a neglected line of thought innervating Krugman’s model, which hinges on the presence of a negative natural rate of interest. This result is argued to ensue from theoretical premises analogous to those present in Samuelson’s 1958 article on the overlapping generations model. In turn, Samuelson obtained a negative equilibrium interest rate by opportunely recasting Böhm-Bawerk’s three causes for a positive rate of interest.

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