It can lead to deflationary pressure and in this situation consumers avoid bonds because they believe interest rates will rise.
Eggertsson and Woodford showed that this phenomenon can be caused by central bank adherence to a Taylor Rule. The government can address this phenomenon with a ‘rules vs. discretion' dichotomy and making announcements, because this phenomenon is caused by consumers' future expectations. It can lead to deflationary pressure and in this situation consumers avoid bonds because they believe interest rates will rise. Friedman offered a solution to this problem involving helicopters, and according to the Keynesian theory, the effective interest rate of zero makes monetary policy ineffective, but this condition can be addressed by issuing debt, a process called quantitative easing. For 10 points, name this situation during the Great Depression as well as modern Japan in which institutions hoard money.
Eggertsson and Woodford showed that this phenomenon can be caused by central bank adherence to a Taylor Rule.
{Liquidity Trap}