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A DISEQUILIBRIUM MODEL OF THE INTEREST RATE

Rui Santos ()
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Rui Santos: Universidade Portucalense, http://www.upt.pt

No 36/2014, Working Papers from Universidade Portucalense, Centro de Investigação em Gestão e Economia (CIGE)

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.

Keywords: Interest rate; General equilibrium; Disequilibrium (search for similar items in EconPapers)
JEL-codes: E13 E21 E43 E60 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2011-05-25, Revised 2011-05-25
New Economics Papers: this item is included in nep-mac
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