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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
References in periodicals archive ?
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.
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.

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