DETERMINANTS OF LIQUIDITY PREFERENCE THEORY: THE VIEWS OF BAUMOL AND TOBINS’ ON PORTFOLIOS OF INVESTMENTS

Abstract

The research examines the variables that influence the liquidity preference theory, focusing on Baumol and Tobin's perspectives on portfolio investments. The Keynesian economic model, which emphasises the value of investing in liquid assets, serves as the foundation for both studies. Tobin (1956), in the framework of liquidity preference theory, focuses on investment balances and explains interest rates as the result of the interplay between the money supply and savers' inclination to keep cash. On the other hand, Baumol (1952) believes that transaction balances are necessary to fulfil working capital requirements. The study comes to the conclusion that the best opportunities should be the basis for investment decisions since both points of view have their roots in Keynesian economics. It also highlights how important it is to comprehend not just why people want cash, even though it usually yields lower returns than other assets, but also how the total demand for cash and different yield levels are inversely related. The study suggests that politicians and monetary authorities should back Baumol's strategy and see money balances as a reserve of buying power that can be used to finance projects when needed. It also emphasises how crucial it is for investors and stakeholders to handle the transactional, speculative, and precautionary reasons why people keep money in the economy as well.