Equilibrium rate of interest

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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 ?
The Fed and other central banks are informally exploring this option now, because it could increase the equilibrium interest rate to 5-6 per cent, and reduce the risk of hitting the zero lower bound in another recession.
The Fed and other central banks are informally exploring this option now, because it could increase the equilibrium interest rate to 5-6%, and reduce the risk of hitting the zero lower bound in another recession," he writes.
Given an assumption for the medium-term equilibrium interest rate norm, these rules promise to deliver a level of the short-term rate that would be consistent with driving the economy back to a sustainable non-inflationary path starting from current macroeconomic conditions.
These two equations can be solved simultaneously to determine the equilibrium interest rate and the rate of innovation.
Keywords: monetary policy, zero lower bound, potential growth, equilibrium interest rate, risk management, credibility, Unconventional policy ***
The size of these volume increases may be largely unrelated to the cost of the associated credit subsidies; in some instances, a small subsidy may lower the equilibrium interest rate enough to attract both low- and high-risk borrowers in situations where no private loans could be offered without lenders taking a loss.
For central banks, measuring the equilibrium interest rate -- an abstract concept that cannot be observed -- is a formidable challenge.
Recall that the equilibrium interest rate for foreign currency loans can be written as:
Competitive equilibrium consists of initial investments s and x, value functions V(s, x; [theta]), a date-1 price p for the long-term asset, and a gross interest rate R in the hidden retrade market such that (i) given p and R, value functions solve (36); (ii) given V, investment choices s and x solve (35); and (iii) the date-1 market for the long-term asset clears, E[n([theta]; s, x, p)] = 0, and R is an equilibrium interest rate on the hidden retrade market.
7) To solve analytically for the equilibrium interest rate, Allais assumes the following functional forms.
d] = y, which implies an equilibrium interest rate (8) as follows:
First, if both risk premiums increase, the change in the equilibrium interest rate depends on the relative magnitude of those increases, whereas the effect on income is always negative.

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