The basic model presents an endowment economy with cash in ad- vance constraints. Consumers can hold money or one-period bonds and the nominal value of consumption in each period cannot exceed money holdings. When interest rates are positive, the cash in advance con- straint will bind, and prices will be proportional to the money supply. Starting with this simple model, the first interesting result is that even in a full-employment flexible price economy, a version of the liquidity trap will arise when nominal interest rates fall to zero. In this case, people become indifferent between holding money and bonds, the cash in advance constraint is no longer binding, and prices and the interest rate no longer reflect current changes in the supply of money.
Money becomes irrelevant.
The consequences of a trap get a bit more interesting when there exists some nominal rigidity in this case, a predetermined price level in the first period. But in either case, one issue that becomes apparent with these models is that it is hard to think seriously about stabilization policy in the context of an endowment economy. Further, if the models are to apply to Japan, one must surely wonder how the enormous stock of past savings might change the model dynamics. In Japan's case, it is hard to think of consumption in each period being constrained by current money holdings or income levels. The next issue that Krugman addresses is the role of productive investment.