In the Keynesian view interest could be seen as the reward for parting with money and so does the liquidity preference relationship stands. It is true that at a very low interest yield people would stay liquid by stuffing the cash under the mattress rather than to invest. However, this behavior seems to be challenged when today the bonds (a relatively illiquid asset) are yielding negative interest rates and are still finding investors.
The behavior for going with bonds that yield negative interest rates could then be explained with the help of another set of investor preference such as the ‘time-preference’ rather than the ‘liquidity-preference’. It is also worrying if this time the investors may hold the negative yield earning bonds in expectation that there would be more such downfall in the negative territory. The late economist Irving Fisher postulated in his theory that the interest rates result from the interaction of two forces i) time preference that people have for capital now and ii) the investment opportunity principle, that investment now will yield more returns in the future. However, when costs and security issues for handling cash become enormous investor may pay bank some interest for safeguarding the cash and prefer to earn negative returns. Where does this freewheeling in the negative territory stops? Currently no one knows, as the curious bond investors and the central bankers are still watching.
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