Liquidity preference
Also known as: liquidity preference theory · Liquidity Preference
- 1Introduced by John Maynard Keynes in 1936.
- 2Explains the determination of interest rates through money supply and demand.
- 3Refines Silvio Gesell's theory regarding the store of value function.
- 4Treats money as a liquid asset that individuals prefer to hold.
In macroeconomic theory, liquidity preference is the demand for money, considered as liquidity.
Connections1
determinant of money demand and velocity
Keynesian theory suggests that the demand for money, which is the inverse of velocity, is influenced by the public's preference for holding liquid assets over spending them.
Liquidity preference is a macroeconomic theory that defines the demand for money based on its utility as a liquid asset. It posits that individuals hold money rather than investing it because of the inherent value of liquidity, which influences the determination of interest rates.
This concept was introduced by John Maynard Keynes in his seminal 1936 work, The General Theory of Employment, Interest and Money. Keynes refined earlier ideas, specifically building upon the work of Silvio Gesell, to explain how the supply and demand for money interact to set the cost of borrowing in an economy.