Liquidity, Its Origins and Effects

Edward M. Miller

American Journal of Economics and Sociology, 1986, vol. 45, issue 1, 27-39

Abstract: Abstract. Accumulation of wealth claims—financial assets—gives the owner the option of present or future consumption and serves as a fund for it or as a reserve “against unforeseen contingencies” (Katona). In the latter case it reflects income uncertainties and the difficulties of borrowing in any time of personal emergency, or corporate special need. The borrowing rate must always be less than the lending rate to offset transaction costs; this gives rise to a spectrum of interest rates as economies of scale operate in capital raising and capital investing to overcome costs of achieving and improving liquidity. Uncertainty is a psychosocial factor in financial markets which makes traditional static two‐period models of limited value and requires dynamic multiperiod models for more comprehensive analyses.

Date: 1986
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