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