Friday, November 10, 2017

Interest rates and dynamic equilibrium

What if we combine an information equilibrium relationship A ⇄ B with a dynamic information equilibrium description of the inputs A and B? Say, the interest rate model (described here) with dynamic equilibrium for investment and the monetary base? Turns out that it's interesting:

The first graph is the long term (10-year) rate and the second is the short term (3 month secondary market) rate. Green is the information equilibrium model alone (i.e. the data as input), while the gray curves show the result if we use the dynamic equilibria for GPDI and AMBSL (or CURRSL) as input.

Here is the GPDI dynamic equilibrium description for completeness (the link above uses fixed private investment instead of gross private domestic investment which made for a better interest rate model):

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Also, try to avoid the use of dollar signs as they interfere with my setup of mathjax. I left it set up that way because I think this is funny for an economics blog. You can use € or £ instead.