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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Recall that the equilibrium interest rates on loans under perfect information can be written as:
Recall that the equilibrium interest rate for foreign currency loans can be written as:
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.
This may occur directly if households are subject to time varying credit frictions, as in Ctirdia and Woodford (2009), Mendoza (2010), and Guerrieri and Lorenzoni (2011), or indirectly if, as in Carlstrom and Fuerst (1997), changes in the intensity of credit frictions applying to firms affect the equilibrium interest rate received by households who lend to these firms.
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.
At the same time, it decreases the equilibrium interest rates, which tends to decrease the marginal cost of investment.
asset supply caused by the subprime crisis should lower equilibrium interest rates and trigger a rebalancing away from now-"toxic" U.
Equivalently, the price of commodities needs to rise sufficiently to depress equilibrium interest rates and make inventory accumulation profitable.
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.
The equilibrium interest rates and equity prices for the case [alpha] = 4 are shown in the top two panels of figure 4 as functions of the index i of the population pyramid [[DELTA].
To answer specific questions about the behavior of exchange rates, we obtain closed-form solutions for agents' demand functions, equilibrium interest rates, and the equilibrium exchange rate.
It enables us to show that the equilibrium interest rates, generated by the empirically supported parameter settings used to calibrate the household model, are consistent with both the financial bequest constraint and with some surprising conclusions about deficit policy.

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