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MENTAL MODEL · M5821

Liquidity Preference

Liquidity Preference
BusinessHigh supportMacroeconomics
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Version 1.0.0 · Updated 2026-07-28

CORE DEFINITION

Liquidity preference theory (also known as money demand): an economic concept. Due to the flexibility of money in use, people prefer to sacrifice interest income and hold non-interest-bearing money to preserve wealth. It is one of Keynes's three fundamental psychological laws. Liquidity preference theory is used to explain people's demand for money. According to this theory, money demand consists of transaction demand, precautionary demand, and speculative demand. Expectation theory - liquidity theory. The longer the maturity, the higher the investment risk usually, and investors do not like to bear risk. Therefore, if the returns of long-term and short-term bonds are exactly the same, investors will inevitably choose short-term bond investment. Therefore, if investors invest in long-term bonds, they must be compensated accordingly, which is called liquidity risk premium. The longer the maturity, the higher the liquidity risk premium. Therefore, the long-term dividend yield is not only the expected value of the short-term dividend yield, but also includes the liquidity risk premium. That is, long-term dividend yield = expected value of short-term dividend yield + liquidity risk premium. Therefore, there are two factors affecting the dividend yield curve: the expectation of short-term dividend yield and the liquidity risk premium.

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Liquidity preference theory (also known as money demand): an economic concept. Due to the flexibility of money in use, people prefer to sacrifice interest income and hold non-interest-bearing money to preserve wealth. It is one of Keynes's three fundamental psychological laws. Liquidity preference theory is used to explain people's demand for money. According to this theory, money demand consists of transaction demand, precautionary demand, and speculative demand. Expectation theory - liquidity theory.

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Keynesian theory: People prefer to hold the most liquid money rather than low-liquidity assets such as bonds. Interest rate is the reward for giving up liquidity. Money demand is composed of three motives: transaction, precautionary, and speculative.

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    zh.wikipedia.orghttps://zh.wikipedia.org/wiki/%E6%B5%81%E5%8A%A8%E6%80%A7%E5%81%8F%E5%A5%BDZH · Explicit
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