Recall that the equilibrium interest rates on loans under perfect information can be written as:
Recall that the equilibrium interest rate for foreign currency loans can be written as:
Furthermore, in the same way as a tax on credit, credit frictions impact equilibrium interest rates, which also impact agents who are not subject to the underlying commitment or informational problems.
This may occur directly if households are subject to time varying credit frictions, as in Ctirdia and Woodford (2009), Mendoza (2010), and Guerrieri and Lorenzoni (2011), or indirectly if, as in Carlstrom and Fuerst (1997), changes in the intensity of credit frictions applying to firms affect the equilibrium interest rate received by households who lend to these firms.
Then, if a deadweight cost is introduced into external finance, the equilibrium interest rates must fall to allow the firms to break even--otherwise, no firm would be willing to raise external finance.
At the same time, it decreases the equilibrium interest rates, which tends to decrease the marginal cost of investment.
asset supply caused by the subprime crisis should lower equilibrium interest rates and trigger a rebalancing away from now-"toxic" U.
Equivalently, the price of commodities needs to rise sufficiently to depress equilibrium interest rates and make inventory accumulation profitable.
These two inequalities ensure that the equilibrium interest rates
do not exceed project maximum yield and that we do not deal with a corner solution.
The equilibrium interest rates
and equity prices for the case [alpha] = 4 are shown in the top two panels of figure 4 as functions of the index i of the population pyramid [[DELTA].
To answer specific questions about the behavior of exchange rates, we obtain closed-form solutions for agents' demand functions, equilibrium interest rates
, and the equilibrium exchange rate.
It enables us to show that the equilibrium interest rates
, generated by the empirically supported parameter settings used to calibrate the household model, are consistent with both the financial bequest constraint and with some surprising conclusions about deficit policy.