Liquidity Trap, the Case of Albania

Abstract

The liquidity trap is a rare economic phenomenon. It is associated with the phenomenon of deflation and other economic phenomena with negative consequences for the economy. It is caused by switching positions to extreme curves of aggregate demand and supply, the demand for loans, deposits, etc. This means that curbs of these aggregates pass almost completely horizontal or almost completely vertical. In the case of the Albanian economy these aggregates are insensitive by changes of basic interest rate and repo rate. The data of the last 19 months shows this situation. This makes the monetary policy of the Bank of Albania lose trasmision. Lose of this effect consequently leads to not influence monetary policy to the economic growth. In these conditions economic growth is affected expansionary by fiscal policies applied by the government. Since the inflation rate is low, and in downward trend, we propose money emission to increase the amount of money in circulation. With this move will increase aggregate demand by stimulating the growth of aggregate supply. In this paper have used analysis, comparison, synthesis, description and statistical-econometric methods.

DOI: 10.5901/ajis.2016.v5n3p95