Liquidity preference hypothesis

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Liquidity preference hypothesis

The argument that greater liquidity is valuable, all else equal. Also, the theory that the forward rate exceeds expected future interest rates.

Liquidity Preference Hypothesis

A theory stating that, all other things being equal, investors prefer liquid investments to illiquid ones. This is because investors prefer cash and, barring that, prefer investments to be as close to cash as possible. As a result, investors demand a premium for tying up their cash in an illiquid investment; this premium becomes larger as illiquid investments have longer maturities. This theory is more formally stated as: forward rates are greater than future spot rates. John Maynard Keynes was the first to propose the liquidity preference hypothesis. See also: Keynesian economics.
References in periodicals archive ?
Closer inspection finds Culbertson relying on the empirical tendency of expectations concerning changes in the future price level affecting long-term debt yields, as well as liquidity preference theory.
He researches the four key theories of money demand--The Quantity Theory of Money, Keynes's Liquidity Preference Theory, Friedman's Modern Quantity Theory of Money, and the Baumol-Tobin Model--and comes up with a list of questions applying the impacts of credit cards and debit cards to the results of the models.
Keynes's Liquidity Preference Theory asserts that there are three motives for holding money--1) a transactions motive 2) a precautionary motive and 3) a speculative motive.
Based on the changes to the transactions motive and the precautionary motive, money demand based on Keynes's Liquidity Preference Theory would decrease.
The concepts analyzed in this chapter include liquidity preference theory, sticky prices and money demand, liquidity preference with motion, monetary trends, money, and separation effects.
They are the Quantity Theory of Money, Keynes's Liquidity Preference Theory, Friedman's Modern Quantity Theory of Money, and the Baumol-Tobin Model.