The Investigation Into Liquidity Trap And Its Applicability To China

The global financial crisis that began from 2008 stimulates the world's nerves with its unprecedented breadth and depth. In response to the deepening economic recession, many countries cut interest rates repeatedly; therefore have accessed to ultra-low interest rate period. The paper focuses on whether lower the interest rate would recover the economy, or impel the economy into "liquidity trap" in the situation of economic recession. Firstly, by analyzing the background and theory traceability of the "liquidity trap", the article makes the a comprehensive elaboration and evaluation of Keynes "liquidity trap", and also makes a comparative reference and an in-depth analysis of development of the theory "liquidity trap" made by economists such as Hicks, Krugman, Svensson. Then the paper inspects the economic performance and politics of Japan during its period that dropped into "liquidity trap", in respect that Japan is considered as the only country that had dropped into "liquidity trap" in the entire world by theorists and economists. By examining disadvantages of zero interest policy, it is obviously that can learn lessons from Japan. Based on the above, the paper makes qualitative and quantitative analysis of the actual operation and indicators of the economy during the interest rate cut cycle in China. Combined with the background of the unique economic system, it deduces a conclusion that China does not have the condition of "liquidity trap", however it has the potential factors that may occur. In the end, the paper puts forward the corresponding policy and suggestion to help the country away from "liquidity trap" and provides a theoretical reference for the decision-making of department of monetary policy.