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A Disequilibrium Model of the Interest Rate

  • Santos, Rui


    (Universidade Portucalense)

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    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 imposition 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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    Paper provided by Universidade Portucalense, Centro de Investigação em Gestão e Economia (CIGE) in its series Working Papers with number 18/2011.

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    Length: 26 pages
    Date of creation: 02 Jun 2011
    Date of revision:
    Handle: RePEc:ris:cigewp:2011_018
    Contact details of provider: 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
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