Edited by Sheila Dow, Jesper Jespersen and Geoff Tily
Chapter 7: Weight of argument and liquidity preference
This chapter investigates the rational foundations of liquidity preference theory as sketched by Keynes in The General Theory. Mainstream theory focuses on two determinants of liquidity preference related to weak uncertainty: risk aversion and transaction flexibility. Keynes, on the other hand, focused mainly on the nexus between liquidity preference and strong uncertainty, distinguishing two basic determinants: strong uncertainty aversion, and strong intertemporal flexibility. Though each of these determinants has been the object of specific interpretations of liquidity preference theory, this chapter suggests that we may encompass their analysis within a more general conceptual framework. To this end, the Keynesian concept of weight of argument plays a crucial role. In particular, we show that its variations along different phases of the business cycle alter the impact of each of the components of liquidity preference.
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