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 ?
More specifically, Keynes did not understand that the pure liquidity preference theory is flawed.
Keynes developed the liquidity preference theory of the interest rate.
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.
What has been missed by many 'Keynesians' of all shades in their interpretation of liquidity preference theory is the importance of the normal rate of interest as an independent variable that is not determined by the forces of "supply and demand'.
How do we reconcile liquidity preference theory with the reality that central banks today operate with a short-term rate target?
Keynes' theory of money is most often referred to as the liquidity preference theory of money, a name attributed to Keynes himself.
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.
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.
They are the Quantity Theory of Money, Keynes's Liquidity Preference Theory, Friedman's Modern Quantity Theory of Money, and the Baumol-Tobin Model.
Unlike Keynes's version of the liquidity preference theory, this approach is not susceptible to the Keynes effect and so provides the foundation for a long-run explanation of unemployment'.
This paper presents the analytical preconditions for one of these key elements, his liquidity preference theory of money.
In chapter 13 Laidler asks what was new about liquidity preference theory (less than you might imagine).