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A Disequilibrium Model Of The Interest Rate

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  • Santos, Rui

    ()
    (Universidade Portucalense)

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    Abstract

    In the setting of a dynamic general equilibrium model we ask the following question: What happens if the interest rate is settled exogenously in a level that differs from the one which emerges from equilibria in the markets? Although the subject of the setting of the interest rate by an external authority on a level that differs from the so called natural interest rate has recently attracted a lot of attention in the literature, the assumption of full general equilibrium has tended to be maintained throughout. The main contribution of this paper is that we allow explicitly for disequilibrium in markets, as is the tradition in other economic models, when the price is settled on a level above or below the equilibrium price. Our main conclusion is that an exogenously imposed interest rate drives the output of the economy to a level below the one that emerges from a general equilibrium without external intervention.

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    File URL: http://siupt.uportu.pt/content/files/dcee/Investigacao/WP_36_2014.pdf
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    Bibliographic Info

    Paper provided by Universidade Portucalense, Centro de Investigação em Gestão e Economia (CIGE) in its series Working Papers with number 36/2014.

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    Length: 24 pages
    Date of creation: 25 May 2011
    Date of revision: 10 Mar 2014
    Handle: RePEc:ris:cigewp:2014_036

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    Postal: Universidade Portucalense – Economics and Management Department (CIGE – Centro de Investigação em Gestão e Economia), Rua Dr. António Bernardino de Almeida, 541-619, 4200 – 072 Porto, Portugal
    Web page: http://www.uportu.pt/site-scripts/centro_pagina.asp?codmenu=71&codcentro=24
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    Related research

    Keywords: Interest rate; General equilibrium; Disequilibrium;

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    1. Thomas Laubach and John C. Williams, 2001. "Measuring the Natural Rate of Interest," Computing in Economics and Finance 2001 35, Society for Computational Economics.
    2. Chow, Gregory C., 1997. "Dynamic Economics: Optimization by the Lagrange Method," OUP Catalogue, Oxford University Press, number 9780195101928.
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