  We prove the existence of a Radner equilibrium in a model with proportional
transaction costs on an infinite time horizon and analyze the effect of
transaction costs on the endogenously determined interest rate. Two agents
receive exogenous, unspanned income and choose between consumption and
investing into an annuity. After establishing the existence of a discrete-time
equilibrium, we show that the discrete-time equilibrium converges to a
continuous-time equilibrium model. The continuous-time equilibrium provides an
explicit formula for the equilibrium interest rate in terms of the transaction
cost parameter. We analyze the impact of transaction costs on the equilibrium
interest rate and welfare levels.
