ON THE IMPOSSIBILITY OF KEYNES'S LIQUIDITY TRAP: CLASSICAL MONETARY ANALYSIS HELPS TO EXPLAIN

Keynes's liquidity-trap proposition entails three flawed arguments: that (1) interest rates are determined by the demand and supply of money rather than credit, of which central bank's money creation is typically a minor part, (2) income allocation decisions entail two rather than three margins, connecting markets for produced goods and services, credit, and money, and (3) money's demand curve becomes horizontal at some low level of interest rate, rather than being always negatively sloped with respect to the value of money, and cannot increase indefinitely. Keynes's liquidity trap's impossibility can be shown without statistical estimations of the money demand curve.