Liquidity preference

The liquidity premium is a term coined by John Maynard Keynes concept from his work The General Theory of Employment, Interest and Money. He thus describes the determination of the interest rate, which is derived from the supply and demand for money.

The theory Keynes here means that interest rates may not be a reward for saving in itself because hoarded money not generate interest, even though the person still does not spend this money. Instead, is the " liquidity premium " the reward for the task of liquidity held in money.

So it is the amount that the debtor must pay to the creditor for the task of liquidity to offset the inherent advantage of liquidity against bonded money. Accordingly, in the Keynesian interest rate is measured as the price premium that is payable for the task of liquidity through the metered contract period. Ideally, the interest income is intended to be above the rate of inflation and to cover the risk of it.

Likewise, so can the moral and emotional value of an illiquid asset are expected for that someone is willing to provide its cash as compensation. This can be translated as available advantage by Keynes.

Theory

According to Keynes each Vermögensgut has a liquidity premium. It is different for a Vermögensgut (English " asset" ) basically three economic variables:

The overall benefit of a good, its own interest ("own - rate of interest" ), then " productivity minus carrying costs plus liquidity premium ", ie "q - c l".

In production capital (eg machines) or use capital ( building) outweighs the productivity value of the other two values ​​( " you have something like this "). For goods not needed and superfluous the carrying costs outweigh ( " you have to care for them and protect and only has burden it "). For money the productivity value is 0 and the carrying costs ( for storage and security) low, the liquidity premium is significant ( " you can buy for what "). The particular difference between money and almost all other financial assets is that the money the liquidity premium to the carrying costs factor outweighs strong, while, conversely, the carrying costs greatly outweigh the liquidity premium to the other assets.

Example

For the flower seller has the ostrich, when they sold him a productivity value: the sales proceeds. He also caused carrying costs: they must put it into the water. He has a liquidity premium for them but not because they want to get rid of him, yes. Can they do not sell it and they must throw it away, then she has only carrying costs. These then also include the cost of disposal.

For a buyer of the ostrich has no productivity value, because they do not want to sell him yes. On the other hand he has for her a liquidity premium, which is why they bought it: depending on the pleasure she feels on giving away, or - if she keeps to himself - the joy of its beauty and fragrance. But she has to take carrying costs in purchase: You must put him into the water, this from time to renew and re- cut the stems.