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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
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References in periodicals archive ?
For a critique of the liquidity preference theory and the liquidity trap from an Austrian perspective, see White, The Clash of Economic Ideas, 133-39; Skousen, The Structure of Production.
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.
In terms of theory, Keynes breaks with tradition and replaces the 'classical' theories of the rate of interest with the liquidity preference theory. 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'.
Aside from this focus on endogenous money and financial instability, major topics addressed by the contributions include chartalism and the tax-drive approach to money; French and Italian circuit theory; the theory of money emissions; the monetary theories of Keynes, Kalecki, Minsky, and Marx; the theory of interest rates; credit rationing; liquidity preference theory; financial liberalization and the relationship between finance and growth; financial bubbles; Keynesian uncertainty and money; speculation, liquidity preference, and monetary circulation; and a property explanation of interest and money.
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 liquidity preference theory is based on the assumption that market participants are averse to risk.
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.
(7) The Keynesian liquidity preference theory of the yield curve is incompatible with the marginal efficiency of capital.
Keynes's Liquidity Preference Theory: Theory introduced by John Maynard Keynes in the 1930s.
'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'.