t ▁which ▁yields ▁so ▁low ▁a ▁rate ▁of ▁interest . ▁In ▁this ▁event ▁the ▁mon et ary ▁authority ▁would ▁have ▁lost ▁effective ▁control ▁over ▁the ▁rate ▁of ▁interest . ▁But ▁whilst ▁this ▁limit ing ▁case ▁might ▁become ▁pract ically ▁important ▁in ▁future , ▁I ▁know ▁of ▁no ▁example ▁of ▁it ▁h ither to . ▁ ▁This ▁concept ▁of ▁mon et ary ▁policy ' s ▁potential ▁imp ot ence ▁was ▁first ▁suggested ▁in ▁the ▁works ▁of ▁British ▁econom ist ▁John ▁H icks , ▁invent or ▁of ▁IS – LM ▁model ing . ▁In ▁fact , ▁Nobel ▁la ure ate ▁Paul ▁K rug man , ▁in ▁his ▁work ▁on ▁mon et ary ▁policy , ▁follows ▁the ▁original ▁form ulations ▁of ▁H icks : A ▁liquid ity ▁trap ▁may ▁be ▁defined ▁as ▁a ▁situation ▁in ▁which ▁conventional ▁mon et ary ▁policies ▁have ▁become ▁imp ot ent , ▁because ▁nom inal ▁interest ▁rates ▁are ▁at ▁or ▁near ▁zero : ▁inject ing ▁mon et ary ▁base ▁into ▁the ▁economy ▁has ▁no ▁effect , ▁because ▁[ mon et ary ] ▁base ▁and ▁b onds ▁are ▁viewed ▁by ▁the ▁private ▁sector ▁as ▁perfect ▁subst it utes . ▁In ▁a ▁liquid ity ▁trap , ▁people ▁are ▁ind ifferent ▁between ▁b onds ▁and ▁c ash ▁because ▁the ▁rates ▁of ▁interest ▁both ▁financial ▁instruments ▁provide ▁to ▁their ▁holder ▁is ▁pract ically ▁equal : ▁The ▁interest ▁on ▁c ash ▁is ▁zero ▁and ▁the ▁interest ▁on ▁b onds ▁is ▁near - zero . ▁Hence , ▁the ▁central ▁bank ▁cannot ▁affect ▁the ▁interest ▁rate ▁any ▁more