What is deflation and liquidity trap and what is the difference?
First, deflation
Deflation refers to the socio-economic phenomenon in which the overall price level continues to fall due to the absolute or relative reduction of the money supply, which causes the appreciation of paper money and the continuous decline of the overall price level.
Deflation is a recession manifested through money, characterized by a continuous decline or even negative growth in the overall price level, a continuous decline in the money supply, and insufficient effective demand. It is generally considered that the consumer price index (CPI) increases by less than 1% year-on-year and lasts for more than 6 months, which is considered to be deflation. The main causes include insufficient aggregate demand and insufficient total supply, and structural reforms, expansionary fiscal policies, and improved income distribution systems can be used to address the causes of deflation.
Second, the liquidity trap
The liquidity trap is that when the interest rate level in a certain period of time is reduced to no longer low, people will have the expectation that interest rates will rise and bond prices will fall, and the elasticity of money demand will become infinite, that is, no matter how much money is added, it will be stored by people. When a liquidity trap occurs, no amount of loose monetary policy can change market interest rates, making monetary policy ineffective.
Liquidity trap is an economic phenomenon, when the economy is in a downturn, the central bank by lowering interest rates to stimulate economic growth and promote inflation, but due to the uncertainty of the market for economic prospects, enterprises and individuals prefer to store funds in safe channels such as banks, rather than investing in the real economy, resulting in the phenomenon that funds do not flow into the real economy, causing economic growth to stagnate and unemployment to rise.
Deflation and liquidity traps are two different economic phenomena, but they can both lead to a slowdown or even a stagnation in economic activity.
