Question
can you help me understand what this paragraph is saying, I know it is discussing why long term deflation should be avoided, but towards the
can you help me understand what this paragraph is saying, I know it is discussing why long term deflation should be avoided, but towards the end it gets so jargon heavy that I cant follow how deflation results in the 'liquidity trap'
"Imagine an economy in which deflation is strongly expected to continue, at a rate which exceeds the natural real interest rate in the economy - that is the equilibrium return on real capital. In that situation, because nominal interest rates cannot fall below zero, the real interest rate set by the central bank cannot go below the natural or 'neutral' rate. Since conventional monetary policy works in an expansionary direction by lowering interest rates in the financial sector below the neutral rate, it follows that conventional monetary policy is rendered incapable of applying stimulus to an economy in this situation. The real interest rate is too high, which means that policy remains too contractionary, prolonging the deflationary pressure. There is a 'deflation trap', or what we learned about in undergraduate economics as a 'liquidity trap;"
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