liquidity trap: a standalone construct

John Maynard Keynes introduced the liquidity trap in his 1936 book The General Theory of Employment, Interest and Money, describing a state in which interest rates have fallen so low that people prefer to hold on to cash rather than lend it or buy bonds, so any new money the central bank supplies is simply hoarded instead of pushing rates down further. John Hicks formalized the idea in 1937 within his IS-LM model, a standard diagram of how interest rates and total output settle into balance, where the trap appears as a flat stretch in which extra money no longer lowers the rate. Paul Krugman revived the concept in 1998 to explain Japan's prolonged slump, arguing that once short-term interest rates reach zero a central bank can no longer stimulate spending by cutting them and must reach for other tools. The construct is distinctive because it names the boundary at which conventional monetary policy stops working, the point where the policy rate is already at or near zero and lowering it can add no further stimulus.[1][2][3]

Unit

A qualitative state of the macroeconomy, not a numerical measure

Recovery means

Not applicable

Measured by

Identified when nominal short-term interest rates sit at or near the zero lower bound while monetary expansion fails to raise output or inflation