Liquidity preference
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According to Keynes, demand for liquidity is determined by three motives:[2]
- the transactions motive: people prefer to have liquidity to assure basic transactions, for their income is not constantly available. The amount of liquidity demanded is determined by the level of income: the higher the income, the more money demanded for carrying out increased spending.
- the precautionary motive: people prefer to have liquidity in the case of social unexpected problems that need unusual costs. The amount of money demanded for this purpose increases as income increases.
- speculative motive: people retain liquidity to speculate that bond prices will fall. When the interest rate decreases people demand more money to hold until the interest rate increases, which would drive down the price of an existing bond to keep its yield in line with the interest rate. Thus, the lower the interest rate, the more money demanded (and vice versa).
The liquidity-preference relation can be represented graphically as a schedule of the money demanded at each different interest rate. The supply of money together with the liquidity-preference curve in theory interact to determine the interest rate at which the quantity of money demanded equals the quantity of money supplied (see
Alternatives
A major rival to the liquidity preference theory of interest is the
Criticisms
In Man, Economy, and State (1962), Murray Rothbard argues that the liquidity preference theory of interest suffers from a fallacy of mutual determination. Keynes alleges that the rate of interest is determined by liquidity preference. In practice, however, Keynes treats the rate of interest as determining liquidity preference. Rothbard states "The Keynesians therefore treat the rate of interest, not as they believe they do—as determined by liquidity preference—but rather as some sort of mysterious and unexplained force imposing itself on the other elements of the economic system."[3]
Criticism emanates also from
See also
- Diamond–Dybvig model
- Liquidity premium
- Liquidity trap
- Money demand
- Money market
- Money supply
- Time preference
Citations
- ^ Macroeconomic Theory, Joydeb sarkhel
- ^ Dimand 2008.
- ^ Murray N. Rothbard (18 August 2014). "Man, Economy, and State with Power and Market" (PDF). Ludwig von Mises Institute. p. 785.
- ^ Parguez, Alain. "Money Creation, Employment and Economic Stability: The Monetary Theory of Unemployment and Inflation Archived 2016-03-04 at the Wayback Machine", Panoeconomicus, 2008, str. 39-67
References
- Gauti B. Eggertsson (2008). "liquidity trap", The New Palgrave Dictionary of Economics, 2nd Edition.
- Liquidity Preference Curve
- Dimand, Robert W. (2008). "Macroeconomics, origins and history of". In Durlauf, Steven N.; Blume, Lawrence E. (eds.). The New Palgrave Dictionary of Economics. Palgrave Macmillan. pp. 236–244. ISBN 978-0-333-78676-5.
- Panico, Carlo (2008). "liquidity preference". In Durlauf, Steven N.; Blume, Lawrence E. (eds.). The New Palgrave Dictionary of Economics. Palgrave Macmillan.