Liquidity

Abstract

Liquidity is a highly complex phenomenon. Its concrete manifestation is powerfully affected by changes in financial institutions and practices, which have been occurring with extraordinary rapidity in recent decades. It calls for analysis both at the microeconomic and the macroeconomic level, with unusually strong dangers of committing fallacies of composition. It needs to be conceptualized both ex ante and ex post, involving recognition that the latter perspective alone facilitates statistical estimation, while the former is more relevant to transactors’ wealth-holding and expenditure decisions. Together, these factors render extremely difficult a definitive answer to the major policy-related issue, namely the extent to which liquidity weakens the Quantity Theory link between ‘money’ stocks and expenditure flows.

This chapter was originally published in The New Palgrave: A Dictionary of Economics, 1st edition, 1987. Edited by John Eatwell, Murray Milgate and Peter Newman