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 ?
Even though the equilibrium conditions are unknown, the rationality of the economic agents puts the expectation of most of them around the equilibrium interest rate. But some agents think that the correct interest rate should be lower or higher than the actual equilibrium value.
Abstract The current monetary policy debate has focused on current estimates and the future path of the natural rate of unemployment and the equilibrium interest rate. Estimates of the natural rate of unemployment should vary over time with changes in demographics and improvements in human capital.
Demographic change can influence the underlying growth rate of the economy, structural productivity growth, living standards, savings rates, consumption, and investment; it can influence the longrun unemployment rate and equilibrium interest rate, housing market trends, and the demand for financial assets.
Alternatively, the riskless asset may be in limited supply and the savings allocated to the riskless asset, to productive investment and to the bubble will determine the equilibrium interest rate.
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.
First, monetary policy strategies based on traditional, simple policy rules lead to poor economic performance when the equilibrium interest rate is low, with economic activity and inflation more volatile and systematically falling short of desirable levels.
Keywords: monetary policy, zero lower bound, potential growth, equilibrium interest rate, risk management, credibility, Unconventional policy ***
These two equations can be solved simultaneously to determine the equilibrium interest rate and the rate of innovation.
For central banks, measuring the equilibrium interest rate -- an abstract concept that cannot be observed -- is a formidable challenge.
First, let us check that with "endowments" ([c.sup.*.sub.1], [c.sup.*.sub.2]), the interest rate R = [R.sup.*] is an equilibrium interest rate in the hidden market.

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