#neir: negative equilibrium interest rate

negative equlibrium interest rate (#neir) even at times of economic growth

(One hint ahead: Be sure you know what equilibrium means. Especiallially it does not mean that it can be reached by the market, in this case because of the zero lower bound (ZLB). That's the problem this website is about to begin with. Sorry, but I got too many responses of people who did not get this.)

This diagram shows how there could be a negative equilibrium interst rate even at times of economic growth:

diagram showing 3 equilibriums: for increasing, unchanged and decreasing natiional debt - #neir

Upper credit demand curve: You might think if GDP is growing, e.g. by 3%, the equlibrium interest rate can hardly be negative at those times. But think about governmental spending! As long as national debt is increasing, the I curve could be considered as raised above its natural level (private profitable investments).

Middle credit demand curve: What would happen if government(s) stop spending more and keep national debt equal over the next periods? The demand curve would be a lot lower.

Lower credit demand curve: What would even happen if government tried to reduce national dept?

I would consider only profitable investments as natural and therefore when even a GDP growth of 3% can only keep the real interest rate slightly above 0% due to the zero lower bound (ZLB), the natural equalibrium interest rate actually would be sharply negative.

But, QE and OMT of central banks as Fed or ECB are often convicted to unnaturally lower the interest rate. But we also know there is also some factor which raises the interst rate: Governmental spending by increasing the total credit demand. This is similar to Crowding Out, but not precisely, because no more private investors would invest at (negative) interest rates above natural equilibrium - du to ZLB. I know, those liberals and monetarists tend to ignore ignore the ZLB in the believe of ever positive natural interst rates and thus have other dynmics in mind. But I strongly doubt their interpretation.

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