# Equilibrium rate of interest

## 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 ?
A Second Puzzle: The Low Equilibrium Rate of Interest
Balancing these risks to the economic outlook depends, in part, on one's confidence in estimating the concepts of the natural rate of unemployment and the equilibrium rate of interest. However, as I have noted, such estimates are not precise and have moved significantly over the past 10 years.
Putting all these pieces together implies that there is no increase in savings either in the United States or in the international economy to cause a fall in the equilibrium rate of interest.
In modern jargon, the monetary architecture determines the 'normal' equilibrium rate of interest.
does nothing to alter either the asymptotically attained balanced growth equilibrium rate of interest ...
However, this equilibrium rate of interest is determined jointly with other variables in the model, such as employment and output.
The monetary shock shifts the short-run supply curve to the right from SS to S'S', because it reduces production costs by driving down the equilibrium rate of interest. Notice that the supply curve is vertical at the maximum output level, [Y.sup.*].
Of the equations I - S = a(r - i) and dM/dt = I -- S, he says, "there exists a definite equilibrium rate of interest [r].
"If the bank rate [i] is raised above the equilibrium rate of interest [r], the demand for loans is affected" (1928, 525).
[p.sub.c] the consumer goods price level [p.sub.I] the investment goods price level pY nominal output C real consumption I real investment S real saving (Kalecki's i) P real profits [C.sub.c] real capitalists' consumption (Kalecki's S) w money wage rate r the equilibrium rate of interest (Kalecki's p) i the money rate of interest L labour supply (Kalecki's R) L labour demand (Kalecki's r) [L.sub.c] labour demand by the consumer goods sector [L.sub.I] labour demand by the investment goods sector
Because the equilibrium rate of interest must be greater than r when the fraction of default is positive, (2) implies [delta] < Br, meaning that liquidating a project is unprofitable for the bank.
A lower value of the natural rate in those years would tend to reduce the calculated equilibrium rate of interest a bit.

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