Abstract
Mainstream authors rediscovered Keynes' liquidity trap as an axplanation of the deflationary slump that has plagued the Japanese economy in the 1990s. However, they give analytical support to the concept in terms of the quantity theory and time preference, theories that Keynes rejected. This paper attempts a rigorous formulation of the liquidity trap, shows how it differs from the recent mainstrean reconstruction by Paul Krugman and draws the consequences of this difference for policy prescriptions for the Japanese economy.
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