Liquidity Preference Theory: A Comparison of William Baumol’s and James Tobin’s Propositions

Abstract

The refinement of liquidity preference theory was formulated by Baumol and Tobin in 1958 and their propositions were based on Keynesian model economy that emphasized on investing in risky assets, instead of transaction balances. William Baumol considered transaction balances to meet the working capital needs of the investors while Tobin emphasized on investment balances that premised on liquidity preference theory that seeks to explain the level of interest rate with regards to the interaction of money supply and desire of savers to hold their savings in cash or near cash. Therefore, the study attempts to compare and contrast liquidity preference theory of William Baumol and James Tobin’s propositions. The study recommends that since both of them are concerned about money, however what need to explain is not only the existence of demand for cash hence its yield is less than the yield on alternative assets but an inverse relationship between aggregate demand for cash and the level of different in yields.