Working Paper: NBER ID: w16204
Authors: Peter F. Basile; John Landon-Lane; Hugh Rockoff
Abstract: This paper reexamines the debate over whether the United States fell into a liquidity trap in the 1930s. We first review the literature on the liquidity trap focusing on Keynes's discussion of "absolute liquidity preference" and the division that soon emerged between Keynes, who believed that a liquidity trap had not been reached, and the American Keynesians who believed that the United States had fallen into a liquidity trap. We then explore several interest rates that have been neglected in previous analyses: yields on corporate debt (from Aaa to junk), bank lending rates, and mortgage rates. In general, our results strengthen the case for believing that there was no liquidity trap in the 1930s in the sense of one that covered the full spectrum of interest rates. The small segment of time in which a liquidity trap might have been present, however, makes drawing firm conclusions risky.
Keywords: Liquidity Trap; Monetary Policy; Interest Rates; Great Depression
JEL Codes: N22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| M2 (E51) | corporate bond yields (G12) |
| M2 (E51) | junk bond yields (G12) |
| monetary policy shocks (E39) | junk bond yields (G12) |
| short-term government rates (E43) | liquidity trap (E41) |
| monetary policy (E52) | corporate bond yields (G12) |
| monetary policy (E52) | mortgage rates (G21) |