liquidity preference


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Related to liquidity preference: Market segmentation theory

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.

liquidity preference

a preference for holding MONEY instead of investing it. KEYNES identifies three motives for holding money:
  1. TRANSACTIONS DEMAND: money held on a day-to-day basis to finance current purchases;
  2. PRECAUTIONARY DEMAND: money held to meet unexpected future outlays;
  3. SPECULATIVE DEMAND - money held in anticipation of a fall in the price of assets. The amount of money held for these purposes depends on two main factors: the INTEREST RATE and the level of NATIONAL INCOME. See MONEY DEMAND SCHEDULE.
References in periodicals archive ?
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, etc.
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 framework.
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.