A Disequilibrium Model Of The Interest Rate
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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| Length: | 24 pages |
| Date of creation: | 25 May 2011 |
| Date of revision: | 10 Mar 2014 |
| Handle: | RePEc:ris:cigewp:2014_036 |
| 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 Web page: http://www.uportu.pt/site-scripts/centro_pagina.asp?codmenu=71&codcentro=24 More information through EDIRC
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References listed on IDEAS
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- Thomas Laubach & John C. Williams, 2003.
"Measuring the Natural Rate of Interest,"
The Review of Economics and Statistics,
MIT Press, vol. 85(4), pages 1063-1070, November.
- Thomas Laubach and John C. Williams, 2001. "Measuring the Natural Rate of Interest," Computing in Economics and Finance 2001 35, Society for Computational Economics.
- Thomas Laubach & John C. Williams, 2001. "Measuring the natural rate of interest," Finance and Economics Discussion Series 2001-56, Board of Governors of the Federal Reserve System (U.S.).
- Chow, Gregory C., 1997. "Dynamic Economics: Optimization by the Lagrange Method," OUP Catalogue, Oxford University Press, number 9780195101928, December.
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