The optimum liquidity theory and other essays

Pascal Blanqué

400 pages, parution le 05/09/2022

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Résumé

This book is a collection of essays on liquidity with a specific market and investment perspective. Liquidity is an elusive notion that remains central to the functioning of modern economies and also to the crises they undergo. Liquidity is hard to define but easy to recognise. This book comprises 3 parts.

Money, Psyche and Liquidity (Part I) deals with the monetary dynamics of liquidity in connection with a psychological referential structured by powerful forces of duration, memory and forgetfulness. The quantity equation of money and important notions such as the interest rate and the velocity of money are, accordingly, revisited from this psychological angle.

Part II deals with the liquidity function. We give a theoretical description of the function, together with applied practical aspects thereof, in connection with the phenomena of multiplication and acceleration, in particular. Important developments are dedicated to the relationship between liquidity and value that leads to the presentation of the Optimum Liquidity Theory. A third key aspect is the liquidity paradox (liquidity disappears when most needed), for which a theory is provided.

Part III deals with the connections between liquidity and asset prices. We analyse the channels through which liquidity exerts a force on both the real and financial cycles. We focus on the role of liquidity - through monetary factors and the interest rate - on the valuation of bonds and equities, and as between them. Finally, we show that, due to the circulation of money and liquidity phenomena in both the real and financial spheres, inflation must be considered as a total phenomenon.

This work on liquidity has been a journey, fuelled by interactions between observation, practice and theory. It includes some ground-breaking contributions: a reformulation of the quantity of money in relation to the monetary dynamics of liquidity; a specification of the liquidity function; a definition of an optimum liquidity; an explanation of the liquidity paradox and an operational framework for asset price behaviour and portfolio decisions.

All of these are formulated within a truly original psychological referential. They all provide an engaging reflection of reality.