The paper discusses simple microfoundations for Liquidity Deflation (Calvo 2016, Chapter 2), which gives rise to … liquidity trap under perfectly flexible prices/wages. Unlike Keynes (1936), this is a Supply Side Liquidity Trap, SSLT, not … by administered prices/wages. Moreover, contrary to (Friedman 1969), under Liquidity Deflation the Optimal Quantity of …

associated with chronic deflation. The discussion highlights the importance of expectations and liquidity, and warns about the … risks of relegating liquidity to a secondary role, as has been the practice in mainstream macro models prior to the Great …