Chapter 24, Problem 24Q

To determine

To Explain:

The way in which nonconventional monetary policy affects the real interest rate for investment at zero lower bound and its impact on credit spread

Concept introduction:

Non-Conventional Monetary Policy:  A central bank usually alters its policy rate to stabilize the economy when it is faced with any supply or demand shock. The bank also uses liquidity interventions so that short-term money market rates stay close to their desired value. Non-conventional monetary policy includes any other action that a central bank can take to stimulate monetary conditions when the first course of action is proved to be impractical or insufficient.

Zero-Lower Bound: The nominal rate of interest has some lower bound. It cannot fall beyond that point. Realistically the nominal rate of interest can be slightly negative as depositors may agree to pay the bank a small amount for keeping their money safe or for providing the convenience of quick money. But for the sake of simplicity of theoretical analysis, it has been assumed by the economists that nominal interest rate cannot be negative. If the central bank finds that the desired real interest rate needs a negative nominal rate of interest, it will set the nominal interest rate to zero. This is known as zero lower bound.