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.
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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.
d] = y, which implies an equilibrium interest rate (8) as follows:
In this setting, the equilibrium interest rate is determined by supply of and demand for investment funds.
In equilibrium, replacing equation 9 back into equation 7 yields the equilibrium interest rate (for the case with inventories; that is, when max ([I.
The equilibrium interest rate in our model is determined by the height of the demand curve at the level of reserve balances supplied by the Federal Reserve.
As the equilibrium interest rate rises, the final-good producers have less (more) incentive to bring forward (postpone) hiring because future hiring becomes less expensive relative to current hiring (the interest rate effect).
Third, comparative-static analysis is applied to determine the potential impact of a change in the exchange rate or the world interest rate on the equilibrium interest rate.
For our purposes, it suffices to acknowledge that these bounds make the dependence between the equilibrium interest rate and the present value of the public good ambiguous.
In simulating the model, we first determine the equilibrium interest rate from equation (10).
The example has three behavioral equations - two equations describe the policy rules of the FOMC and of the discount window, and the third characterizes the reduced-form relationship between the equilibrium interest rate and the fundamental shocks - and one definitional equation relating TR, BR, and NBR.

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