Data and Code for: Liquidity Traps A Unified Theory of the Great Depression and the Great Recession

This review of liquidity traps unifies three landmark economic downturns — the U.S. Great Depression, the Great Recession, and Japan’s Long Recession — into a single analytical framework. We examine various forces that drive natural interest rates negative: temporarily (such as banking crises and debt overhangs) or perma- nently (such as demographic shifts and inequality). When policy rates hit the zero lower bound, conventional monetary tools lose traction. Under a standard monetary policy regime, counterintuitive paradoxes emerge: greater price flexibility deepens recessions, and positive supply shocks become contractionary. We show how policy effects — including the size of fiscal multipliers, forward guidance, and these paradoxes — depend crit- ically on the monetary-fiscal regime and on central-bank credibility. The paper explains how regime changes, such as Roosevelt’s 1933 abandonment of the gold standard and balanced-budget dogmas, successfully re- versed deep slumps by credibly shifting expectations. We examine whether secular-stagnation forces are likely to assert themselves in the coming decades.