Liquidity Preference Research Articles

The effect of a decline in the world real interest rate on a small open economy experiencing persistent stagnation

This paper develops a small open economy model where a strong liquidity preference causes persistent stagnation and shows that a decline in the world real interest rate worsens the stagnation if the rate is already low enough.

The Taxation of Interest Swaps and the Financial Service Charge: Toward a Consistent Approach

The Supreme Court has defined interest as "compensation for the use or forbearance of money."' This definition, and its subsequent interpretation by the courts, requires a direct link between the payment of "compensation" and the "use of money." This link has created a distortion in the current U.S. tax treatment of the administrative cost component of interest and its "financial service charge" substitute, and ambiguity with regard to the taxation of interest swaps.Economically, interest consists, in part, of compensation given to a saver-lender for forgoing current consumption in favor of an ability to consume more in the future ("time preference") and compensation for forgoing a typical preference for liquidity. Interest also reflects compensation for the risks of default and inflation, and reimbursement of the lender's administrative costs. The U.S. tax system has adopted a consistent approach by treating all the interest components alike, and generally, by not bifurcating a fixed amount of interest into its different economic components. This approach can be demonstrated, for example, with regard to the taxation of the inflation component. An exception to this approach however, is the tax treatment of an "abnormal" risk of default under the "junk-bond" provision of the Code.

Rethinking money demand function in Nigeria using Toda-Yamamoto Approach

This study examined the demand for money in Nigeria from 1980 to 2019, employing various techniques of econometric analysis. The study was motivated to determine whether Keynes liquidity preference theory holds in Nigeria and to ascertain whether money demand function is stable in Nigeria. The Augmented Dickey Fuller (ADF) unit root test showed that the variables were stationary at different levels. The test of stability showed that the estimated parameters for the study are stable within the period under study. Thus, money demand function is stable in Nigeria. Considering a year period lag in the estimated money demand function, it was found that there was a positive relationship between money demand and real income during the period of study. It implies that increase in real income (gross domestic product) leads to increase in the demand for money, as predicted by economic theory. The real income (gross domestic product) coefficient is 0.09 which is less than unit and is consistent with the transactions and precautionary theories. However, the inflation rate both at a year and two years period lags had negative signs, and were consistent with a priori expectations. The coefficient of –0.002 and -0.001 respectively showed that the demand for money in Nigeria will decrease by about 0.2% or 0.1% when the inflation rate (at a year or two year lag) rises by 1%. The result indicated that the higher the rate of expected inflation (i.e. higher returns on the alternative assets), ceteris paribus, and the lower is the demand for money in Nigeria. Hence, people would tend to switch to other money alternatives when inflation is anticipated, because they promise higher rates of returns. In the light of the findings, it was recommended that Central Bank of Nigeria should pursue policy aimed at changing the level of income which will influence the demand for money in the same direction.

THE MODERATING ROLE OF FINANANCIAL INNOVATIONS ON THE RELATIONSHIP BETWEEN INTEREST RATE CAP AND ACCESS TO CREDIT BY MICRO, SMALL AND MEDIUM ENTERPRISES IN KISUMU COUNTY

Purpose: The purpose of this study was to investigate the moderating role of financial innovations on the effect of monetary interventions on access to credit by micro, small and medium enterprises in Kisumu County, Kenya. The specific objectives were to assess the effect of interest rate cap on access to credit by MSMEs and to investigate the moderating role of financial innovations on the effect of interest rate cap on access to credit by MSMEs in Kisumu. This study was guided by the Keynesian Liquidity Preference Theory.
 Methodology: The study adopted a descriptive research design with a target population of the 1,472 micro, small and medium enterprises registered at the Department of Social Services in Kisumu County, Kenya. At a confidence level of 95%, a representative sample of 420 MSMEs was obtained based on Yamane Taro’s formula. A closed ended questionnaire was administered to a stratified sample of the finance managers of the micro, small and medium enterprises. A Cronbach’s alpha of 0.801 confirmed the reliability of the instrument while its validity was assessed by expert opinion of finance professionals. Data was analyzed using regression analysis.
 Results: Results showed that interest rate cap had a statistically significant effect on access to credit by micro, small and medium enterprises. Further, financial innovations moderated the relationship between interest rate cap and access to credit. The study concluded that MSMEs’ access to credit depended on the direct and the hierarchical effects of interest rate cap and also that financial innovations moderated these effects.
 Unique contribution to theory, practice and policy: The study recommends that the MSMEs could save with commercial banks to enable them access credit made available through lower interest rates unlike those charged by MFIs. Also, they should take advantage of financial innovations at their disposal to enable them access credit cheaply and fast. The policy makers ought to aim at enhancing access to credit by employing sector specific interventions as opposed to blanket interventions like cushioning MSMEs from high interest rates by providing such funds as funds for inclusion of the informal sector (FIIS) and should also derive policies targeting on improving the process and role of financial innovations in the relationship between interest rate cap and access to credit by MSMEs in Kenya. The study supported the Keynesian liquidity preference theory by positing that interest rates are controlled by the rise and fall of supply and demand for money and should be allowed to adjust freely. This theory could therefore be applied to similar studies.

Fraternal twins—Should investors be careful?*

AbstractAfter analyzing portfolio differences between separate account‐mutual fund twins, we find that dissimilar “fraternal twins” show significantly lower joint performance than “identical twins.” This finding is consistent with fraternal twins competing for the limited attention of a manager while identical twins mutually profit. Furthermore, the effect is stronger for separate accounts, which is probably due to investors having the opportunity to influence managers’ investment decisions according to their preferences. These results are independent of differences in known investment constraints. However, the findings may be driven by separate account investors’ preferences for higher liquidity and lower idiosyncratic risk.

Investment Decisions and Financial Performance of Deposit Taking Savings and Credit Co-Operative Societies in Nairobi City County, Kenya

It is a requirement for Kenyan SACCOS to conform to regulations set by Sacco Societies Regulatory Authority (SASRA). Deposit Taking (DT) SACCOS are very instrumental towards the financial sector in serving an increasing number of rural and urban households. They are required to submit their statements of financial position, deposit returns statement, investments report, statement of liquidity and capital adequacy return reports. With varying degree of success, DT-SACCOS has invested in non-core business areas. This is especially true of DT-SACCOS which have liberalized their investment portfolios in the wake of competition from commercial banks. This study seeks to examine the impact of investment decisions on the financial performance of DT-SACCOS in Nairobi City County. The specific objectives of the study were to determine the effect of investment in real estate, lending to members for development, FOSA products and money and bond markets on the financial performance of DT-SACCOS in Nairobi City County. The significance of this research is to gain a better knowledge of the nature, breadth and extent to which investment decisions are to be of importance to DT-SACCOS performance. This examination is going to be based on agency, portfolio, liquidity preference and Tobin Q theory of investment. A causal research design of research and a target populace of 40 DT-SACCOS is going to be relied on. In terms of the sample size, all the 40 DT SACCOS are going to be studied. Secondary data matrices were used in collecting data from the finance managers. Adherence to the ethical considerations was also guaranteed at every stage. The study showed that: investment in real estate had an insignificant inverse effect (β= -257.42, p=0.369) on the financial performance of DT-SACCOS in Nairobi City County while investment in lending to members for development had significant positive effect (β=2141.85, p=0.044); investment in FOSA products had insignificant inverse effect (β= -45.86, p=0.617) while investment in money and bond markets had insignificant positive effect (β=547.61, p=0.255) on the financial performance of DT-SACCOS in Nairobi City County. To this effect, the study recommends that DT-SACCOS should increase their investment base on lending to members as they are basically aware of the formative intent of the co-operatives. This means that when more loans are issued to members of the co-operative, they first consider the gains they will get which emanates from these rational investment decisions for their development and hence the financial performance of the DT-SACCOS.

Testing the global extent of the endogenous-money hypothesis: a panel vector autoregression approach*

This paper examines the endogenous-money hypothesis using a panel-data set of 144 countries over the period 2001–2017. Its empirical analysis is conducted in a panel vector autoregressive framework, a hybrid econometric methodology that offers the advantage of jointly accounting for endogeneity issues (as in traditional vector autoregressive modeling) and individual/country-level heterogeneity associated with a panel-data structure. A panel version of the Granger non-causality test and an examination of orthogonalized impulse-response functions and forecast error variance decompositions are applied to test the causal ordering among loans, the money base, broad money, output, and prices. The empirical findings support causation running from loans to broad money and from broad money to the monetary base. A causal link running from loans, output, and broad money to total reserves is strongly supported and, in all cases, the causality is unidirectional from these variables to the money base. Beyond that, a complex interaction among prices, production, credit, and money is found, suggesting that the best approach to understanding the endogeneity/exogeneity issue is to rely on the hypothesis of endogenous money as reflected in the ‘liquidity preference’ interpretation.

Rare Disaster, Economic Growth and Disaster Risk Management with Preferences for Liquidity

Rare Disaster, Economic Growth and Disaster Risk Management with Preferences for Liquidity

Kreditna analiza na bazi parametara u evropskom bankarstvu

The subject of this research is to define the methodology for credit analysis and assessment of the degree of credit risk. By researching the subject, we point out the process of the loan application, the margins of acceptable and unacceptable risks. The degree of credit risk by the bank is the result of its preferences for liquidity and profitability. We present the results of financial analysis on a specific company in European bank trough methodology research framework which must be viewed in a comparative context in which we determine the position of companies in a group of related companies, in the sector and branch which belongs to the borrower. Additional caution is required in the use of financial statements refering to their reliability and verification by an independent audit. By this research we point out the process of the loan application procedure trough analysis of financial statements in order to relevantly assess the credit worthiness of users.

Parsimony and Liquidity Ratio Effects on Capital Markets: Evidence from South Africa

From a sample period of 30 years, the study shows that a parsimonious model helps explain the effect of the liquidity ratio on equities and bonds in South Africa. Guided by the combined theoretical model of liquidity preference theory and endogenous money approach, multivariate econometrics modeling is applied in this study. Findings show that as market participants improve their ability to pay off their short-term debts, as measured by liquidity ratio, they tend to decrease raising capital in the equity market and increase borrowing from the bond market. These findings are consistent with the parsimonious model in both the equity and bond markets. Further, the results indicate that the liquidity ratio is inversely associated with the equity index and positively associated with the bond index. All findings are obtained from a long-run horizon in the South African capital markets. Motivated by the financial stability developments in the private and public sectors, the findings contribute to capital formation by financial markets into the mainstream economy. The relationship between liquidity ratio and capital markets can serve as a guide to monitoring the strength of financial leverage and financial stability.

Controlling Directional Liquid Transport on Dual Cylindrical Fibers with Oriented Open‐Wedges

AbstractDirectional liquid transport (DLT) on fibrous systems has been widely used in both natural organisms and practical applications as an important mass transfer strategy. So far, DLTs on fibers are heavily dependent on the conical structure that enables generating the Laplace pressure difference. For the cylindrical fibers, liquid can only transport evenly along both directions of the axis driven by the capillary forces between fibers, which however hardly proceeds directionally in a controllable way. Here, the authors revealed that the dual cylindrical hairs bear the ability of DLT, which is attributable to the wet‐rebuilt open‐wedged scales. Capillary forces along wedge corners facilitate the liquid transport in the against‐scale direction, while the pinning effect at the sharp edges of open‐wedges works cooperatively with the anisotropic retention force imparted by the ratchet structures to inhibit liquid spreading in the with‐scale direction. Consequently, liquid prefers to transport in the against‐scale direction on dual cylindrical hairs. Drawing inspirations, the authors develop the conceptual‐model of dual cylindrical fibers that is capable of DLT, and moreover the DLT with different rectification ratios can be well‐controlled depending on the opening angle of wedges. The result offers new insights for manipulating liquid using cylindrical fibrous systems.

Cash Management on Financial Performance of Non-Financial Firms Listed at Nairobi Securities Exchange

Cash is frequently referred to as the most valuable asset for corporate operations, yet it has also been proven to be a non-returning asset. Financial managers attempt to achieve a balance between the amount of cash available to support business operations and avoiding excessive cash holdings due to the opportunity cost of lost profits. Non-financial entities that are listed on the Nairobi Securities Exchange are known as public non-financial firms. These companies, like all other businesses, are worried about their financial performance since it has a significant impact on their value addition to the economy in general and shareholder wealth maximization in particular. These companies' financial performance, on the other hand, has been volatile over the time period examined in this analysis, which runs from 2004 to 2018. It's unclear whether cash management has had any impact on this performance. On the study variables, this study null hypothesized that cash management has no significant effect on financial performance of non-financial firms listed on the NSE, based on the Keynesian Liquidity Preference Theory and Miller-Orr stochastic cash management theory, as well as the deterministic cash conversion model. The cash flow data and corporate profits needed to calculate return on assets were obtained from these companies' published financial statements. The p-value and the t-statistic were utilized to create the panel data set that was employed in this investigation via regression analysis at a 95 percent confidence interval. The data show that cash management has a favorable impact on a company's financial performance. The findings are consistent with the Keynesian liquidity preference theory, which assumes that businesses keep cash on hand not only for transactions but also for risk management and investment. It appears that the opportunity costs of cash retained for transactions are more than compensated by the opportunity benefits of cash for security and arbitrage profits. Because of the stringent laws that govern banks and other financial institutions, this study was limited to non-financial businesses. As a result, it is suggested that a comparable modified study, with regulatory environment restrictions, be conducted to determine the impact of cash management among financial institutions.. Keywords: Cash management, financial performance, firm size, Non-financial firms listed in NSE DOI: 10.7176/RJFA/12-23-01 Publication date: December 31 st 2021

Firm Characteristics and Operational Efficiency of Agricultural Firms Listed at Nairobi Securities Exchange in Kenya

Operational efficiency has attracted much interest in corporate finance literature over several decades. However, in the context of the agricultural sector, it has received little attention in developing economies such as Kenya. Operational efficiency and performance of Agricultural firms listed at the Nairobi securities Exchange have been fluctuating over the years. This is partly attributed to specific firm characteristics. The objective of this study was to determine the relationship between firm characteristics and operational efficiency of agricultural firms listed at Nairobi securities Exchange. The study was anchored on trade off theory, liquidity preference theory, agency theory, miller and Orr’s cash management model. The target population was 7 agricultural companies listed at Nairobi securities exchange. The study used audited financial statements’ secondary data collected from 2011 to 2020. Data was analysed using descriptive statistics, correlation analysis and panel data regression analysis with the help of STATA version 13. The study found out that there was a significant negative relationship between asset tangibility, firm size and operational efficiency of agricultural companies listed at Nairobi securities exchange. Further, there is a significant positive relationship between cash reserves and operational efficiency of agricultural firms listed at Nairobi securities exchange. This study recommends that management of agricultural companies listed at Nairobi securities exchange should pay attention on asset tangibility, firm size and cash reserves because they have a significant relationship with operational efficiency. Firms can utilize productive assets as collateral for debt without incurring high borrowing costs. The firm size should be optimal because very large firms are characterised by inefficiencies due to control weaknesses. Policy makers should incorporate factors such as asset tangibility, firm size and cash reserves in their strategic plans. Keywords : Operational efficiency, firm characteristics, firm size, liquidity, asset tangibility and cash reserves. DOI: 10.7176/RJFA/12-24-01 Publication date: December 31 st 2021

READING KEYNES’S POLICY PAPERS THROUGH THE PRISM OF HISTREATISE ON PROBABILITY: INFORMATION, EXPECTATIONS, AND REVISION OF PROBABILITIES IN ECONOMIC POLICY

When scholars investigate the legacy of John Maynard Keynes’sTreatise on Probability(1921) for the development of Keynes’s thinking, the attention usually focuses on the connections among Keynes’s probability theory, his conception of decision-making under uncertainty, and the theory of the functioning of the macroeconomic system that derives from it—through the marginal efficiency of capital, the preference for liquidity, and the self-referential functioning of financial markets. By contrast, this paper aims to investigate the connections between Keynes’s probability theory, on the one hand, and his economic policy recommendations, on the other. It concentrates on the policy recommendations defended by Keynes during the Great Depression but also after theGeneral Theory.Keynes’s economic policy can be understood as a framework for decision-making in situations of uncertainty: fiscal policy aims to induce private agents to change their “rational” probability statements, while monetary policy aims to allow more weight to these statements.

Liquidity Choice: A Study of Theoretical and Empirical Mystery in Context of Pakistan

Contextual difference and inclusion of demographics as independent as well as new dimension of Liquidity preferencemade the study unique and novel in its essence. Empirical result of the correlation matrix is showing aninsignificant correlation of liquidity preference with gender, age, education, experience, annual income, annual savings, occupation and location.Regression analysis depicts significant relationship of liquidity preferencewith Education and Savings given by t-values -2.129, 2.190 and p-values -0 .620, 0.029 respectively.Liquidity preference is showing an insignificant relationship with Gender, Age, Experience, Income and Occupation given by t-values 0.117, 0.076, -1.220, -0.708,-0.144 and p-values .009, 006,-.120,-.075 and -.011 respectively.

Why has the Brazilian economy stagnated in the 2010s? A Minskyan analysis of the behavior of non-financial companies in a financialized economy.

The Brazilian economy entered a deep recession in 2015–2016 and since then has shown a sluggish recovery. In this paper, we offer an interpretation for the slow growth based on Minsky’s financial instability hypothesis and recent literature on financialization and growth. We analyze the balance sheet of large non-financial companies over the period 2012–2019, a period that comprises the positive investment cycle—initiated during the commodities boom which lasted from the second half of the 2000s until 2014—the 2015–2016 recession, and the period preceding the shock of the COVID-19 pandemic. Based on Minsky’s taxonomy of financial profiles, we map a proxy for financial instability at the firm level based on Davis et al. (2019). We also propose an aggregate financial stability index. We conclude that after the 2015–2016 recession, companies have been restructuring their debt profile and adopting a defensive behavior, increasing their liquidity preference. Our analysis supports the interpretation that, even with the sharp fall in domestic real interest rates, the degree of confidence on expectations to recover investment in productive assets is low. This corroborates with the thesis that agents’ decisions do not respond only to supply stimulus, but are guided by expectations of future returns, which fundamentally depend on the performance of aggregate demand. Since 2015, Brazilian economic policy has been driven by fiscal consolidation, which has proven ineffective in increasing economic growth.

Can the Federal Reserve Effectively Target Main Street? Evidence from the 1970s Recession

Modern central bankers confront a challenge of providing economic stimulus even when the policy rate is constrained by a lower bound. This challenge has led to substantial innovation by policymakers and a proliferation of new policy tools. In this paper, I offer evidence on the efficacy of a new tool known as funding for lending, which provides banks with subsidized funding to make additional loans. I focus on a historical episode from the United States in which the Federal Reserve provided banks with steeply subsidized loans to promote the expansion of credit within their local communities. I show that the cheap funding succeeded in generating more lending by countering banks' excessive liquidity preference. The additional credit benefited the real economy. Local areas enjoyed higher rates of small business formation and more rapid employment growth. Finally, I show that the cost of the subsidy provided by the government was more than offset by the additional payroll taxes paid out of higher wages and salaries. These results suggest that funding for lending programs deserve consideration for the modern central banker's toolkit and demonstrate that certain unconventional tools can offer monetary policymakers the means to pursue more targeted objectives.

Financial crisis and slow recovery with Bayesian learning agents

AbstractIn a simple continuous‐time model where the learning process affects the willingness to hold liquidity, we provide an intuitive explanation of business cycle asymmetry and postcrisis slow recovery. When observing a liquidity shock, individuals rationally increase their subjective probability of re‐encountering it. It leads to an upward jump in liquidity preference and a discrete fall in consumption. Conversely, as a period without shocks continues, they gradually decrease the subjective probability, reduce liquidity preference, and increase consumption. The recovery process is particularly slow after many shocks are observed within a short period because people do not easily change their pessimistic view.

Performance Analysis and Liquidation Preference under Insolvency and Bankruptcy Code in India

The Insolvency and Bankruptcy Code (2016) was introduced with the main objective of maximization of value of assets and revival of stressed assets. The paper analyses the performance of the Insolvency and Bankruptcy Code (IBC) 2016 on various parameters since its inception. The paper emphasises the fact that in order to achieve the timeline whether the code is favouring liquidation over resolution. The paper is qualitative in nature analyzing the performance of the IBC on various parameters. The study finds out that the code has given positive results on the resolution of insolvency of 12 major NPA accounts as compared to other previous schemes but in order to prove its efficacy it has somewhere missed its major objective of resolution of stressed assets, which is its primary objective, and favored liquidation. The paper will give an overview of the performance of the code which is a gap in literature as it is a new code in Indian insolvency regime.

Liquidity Preference Theory or Loanable Funds Theory

In Keynes’s approach, interest rates are driven up by rises in demand for money and scaled down by rises in money supply. On the contrary, this paper argues that neither of these propositions will stand the test of scrutiny. Keynes traced demand for money to three main factors, the transaction, precautionary and speculative motives, but rises in demand associated with the transaction motive do not necessarily drive up the rate of interest. 
 The paper shows also that the liquidity preference theory and the loanable funds theory are different theories and that the former is faulty, while the latter is correct.