Low equilibrium interest rates
are an important anchor for local and external debt prices in emerging markets.
The equilibrium interest rates
for Poland and Brazil have been revised downward to 5% and 10.75% respectively, reflecting the overall decrease in central bank interest rates for these jurisdictions and reduced volatility risk.
If those who believe we are in a period of secular stagnation are right and equilibrium interest rates
have fallen far, we could "see rising interest rates slow the economy considerably, and the Federal Reserve will find itself unable to raise rates as much as it is planning to."
Of course, there are a number of other forces that influence equilibrium interest rates
, both lower and higher.
Globally, structural measures can create the conditions for equilibrium interest rates
to rise once more.
For example, for the figure 1 parameters, faced with the pooling equilibrium interest rates
, unconstrained Type Bs would borrow about 30 percent more.
Given our assumptions that [i.sub.f] = 0, and that (1) holds, this leads to the following equilibrium interest rates
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.
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.
The third exit solution proposed in the literature is the use of capital controls that would restore independence to national monetary policy, so that real equilibrium interest rates
could differ across countries.
asset supply caused by the subprime crisis should lower equilibrium interest rates
and trigger a rebalancing away from now-"toxic" U.S.
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.