Equilibrium rate of interest

Equilibrium rate of interest

The interest rate that clears the market. Also called the trade-clearing interest rate.

Equilibrium Rate of Interest

In money markets, an interest rate at which the demand for money and supply of money are equal. When a central bank sets interest rates higher than the equilibrium rate, there is an excess supply of money, resulting in investors holding less money and putting more into bonds. This causes the price of bonds to rise, driving down the interest rate toward the equilibrium rate. The opposite occurs when interest rates are lower than the equilibrium rate: there is excess demand for money, causing investors to sell bonds to raise cash. This decreases the price of bonds, causing the interest rate to rise to the equilibrium point. Central banks can use the equilibrium rate of interest as a tool in determining the appropriate money supply.
References in periodicals archive ?
does nothing to alter either the asymptotically attained balanced growth equilibrium rate of interest .
Like Wicksell, Cassel stressed that "stability of prices is possible only when the bank rate is kept equal to the equilibrium rate of interest," that is, when the rate differential is zero (1928, 517).
If the bank rate [i] is raised above the equilibrium rate of interest [r], the demand for loans is affected" (1928, 525).
Because the equilibrium rate of interest must be greater than r when the fraction of default is positive, (2) implies [delta] < Br, meaning that liquidating a project is unprofitable for the bank.
When this occurs, the equilibrium rate of interest is indeed the larger root [r.
The monetary shock shifts the short-run supply curve to the right from SS to S'S', because it reduces production costs by driving down the equilibrium rate of interest.
However, this equilibrium rate of interest is determined jointly with other variables in the model, such as employment and output.
A lower value of the natural rate in those years would tend to reduce the calculated equilibrium rate of interest a bit.

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