General Equilibrium Real and Nominal Interest Rates

We derive the general equilibrium short-term real and nominal interest rates in a monetary economy affected by technological and monetary shocks. We show that an inherent feature of our equilibrium is that any real variable dynamic driven by both monetary and real factors, implying that money is generically non-neutral. We than analyze a specialized version of this economy. The short-term nominal rate dynamics we obtain encompasses most of the dynamics present in the literature, from Vasicek and CIR to recent quadratic and, more generally, non-linear interest rate models.

LIOUI, A. and PONCET, P. (2004). General Equilibrium Real and Nominal Interest Rates. Journal of Banking and Finance, pp. 1569-1595.