Keynes developed the liquidity preference
theory of the interest rate.
According to Keynes, the basic reason that unemployment could arise was that, to use a more modern terminology than he deployed himself, liquidity preference
interfered with the rate of interest's ability to keep the allocation of resources over time coordinated in the face of changing investment and saving decisions, thus forcing it to abdicate this task to movements in income and employment; and monetary cures for unemployment were unreliable because the sensitivity of the demand for money to the rate of interest might place limits on the expansionary impact of increases in real balances, even when these were brought about directly by policy-induced increases in the supply of nominal balances, rather than price level variations.
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.
However, if for instance we hear the following statement (randomly selected): "the curve of the liquidity preference
, of the demand for currency, can deform, it can move to plan (i, Y); first due to the evolution in the economic agents' behavior in result to banking innovations modifying the demand for currency; then, because depending on the political or economic context, the economic agents' demand for currency (for a given interest rate) can change, and also because function L is dependant on the production and activity level; (.
As he cautions, an increase in liquidity preference
cannot increase the quantity of hoards, "[f]or the amount of hoarding must be equal to the quantity of money .
Keynes' theory of money is most often referred to as the liquidity preference
theory of money, a name attributed to Keynes himself.
By 1933 the basic elements of the big picture are in place - the short run output adjustment framework, the theory of liquidity preference
According to the liquidity preference
hypothesis advanced by Hicks (1946) the term premium is positive and increasing with maturity.
The strength of the liquidity preference
is based on the three motives for liquidity: the transactions motive, the precautionary motive, and the speculative motive (Keynes, 1936, pp.
Mishkin |1992, 118~ not only embraces the liquidity-preference theory, but also argues incorrectly that in a model in which there are two kinds of assets, money and bonds, "the liquidity preference
For Rallo the interest rate, or the structure of interest rates, is determined both by time preference and liquidity preference
Since he intervened to rescue Bear Stearns in March, Paulson has been trying to pump cash into markets that are locking up because of investors' extreme liquidity preference