ZERO NOMINAL INTEREST RATES, UNEMPLOYMENT, EXCESS RESERVES AND DEFLATION IN A LIQUIDITY TRAP

We present a dynamic monetary model that consistently explains various phenomena such as unemployment, deflation, zero nominal interest rates and excess reserves held by commercial banks. These phenomena were observed during the Great Depression in the USA, the recent long-run stagnation in Japan and the recent depression triggered by the subprime loan problem in the USA. We show that an excessive liquidity preference leads to a liquidity trap and thereby generates the phenomena.