Definition of liquidity preference theory

in keynesian economics, the desire by investors to hold their money in liquid assets, such as checking accounts, rather than nonliquid assets (stocks, bonds, real estate). This preference is explained by: (1) a transactional motivation, or the desire to keep money available for spending as needed; (2) a precautionary motivation, characterized by the reluctance to keep money tied up in assets not readily convertible to cash; and (3) the speculative motive, a belief that interest rates may be going up in the future. According to the Keynesian theory, interest is the payment to investors to persuade them to give up their liquidity. Longer-term investments, therefore, would command higher rates over shorter-term investments. This premium is known as the liquidity premium. Contrast with expectations theory.