Agent-Based Model Liquidity Preference (ABMLP) is a computational interpretation of the third sectoral system described by Wynne Godley and Marc Lavoie (G&L).
The interest rate offered will affect the composition of a household agent's asset portfolio. Building on the simpler ABMPC, model households now have a third financial asset in which to invest. Household agents will choose, based on their expectations and liquidity preferences, to allocate wealth between money, bills and long-term government bonds.
Mirroring Godley & Lavoie (G&L) pp.133-135.
When household agents make their long-term bond decisions, three features matter. First households are concerned with the price that the long-term bond fetches in the current period, for this defines the yield of the asset which will arise in the next period (model step). Second, what also matters is the expected price of the bond in the next period, when it will be possible to sell the bond. These two prices help define what we shall call the pure expected rate of return on bonds. The third factor is the confidence with which households hold their expectations about future bond prices. In a model where there may be a multiplicity of household agent opinions, it is a measure of the weight that households investors attribute to the validity of their expectations.
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