IDEAS home Printed from
   My bibliography  Save this article

The Liquidity Trap and the Pigou Effect: A Dynamic Analysis with Rational Expectations


  • McCallum, Bennett T


A Keynesian idea of considerable historical importance is that, in the presence of a liquidity trap, a competitive economy may lack--despite price flexibility--automatic market mechanisms that tend to eliminate excess supplies of labor. The standard classical counterargument, which relies upon the Pigou effect, has typically been conducted in a comparative-static framework. But, as James Tobin has recently emphasized, the more relevant issue concerns the dynamic response (in "real time") of an economy that has been shocked away from full employment. The present paper develops a dynamic analysis, in a rather standard model, under the assumption that expectations are formed rationally. The analysis permits examination of Tobin's suggestion that, because of expectational effects, such an economy could be unstable. Also considered is Martin J. Bailey's conjecture that, in the absence of a stock Pigou effect, Keynesian problems could be eliminated by expectational influences on disposable income.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • McCallum, Bennett T, 1983. "The Liquidity Trap and the Pigou Effect: A Dynamic Analysis with Rational Expectations," Economica, London School of Economics and Political Science, vol. 50(200), pages 395-405, November.
  • Handle: RePEc:bla:econom:v:50:y:1983:i:200:p:395-405

    Download full text from publisher

    File URL:
    File Function: full text
    Download Restriction: Access to full text is restricted to JSTOR subscribers. See for details.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Bennett T. McCallum, 1988. "The Role of Demand Management in the Maintenance of Full Employment," NBER Working Papers 2520, National Bureau of Economic Research, Inc.
    2. C.A. Ullersma, 2001. "The Zero Lower Bound on Nominal Interest Rates and Monetary Policy Effectiveness: a Survey," MEB Series (discontinued) 2001-9, Netherlands Central Bank, Monetary and Economic Policy Department.

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:econom:v:50:y:1983:i:200:p:395-405. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.