EBK THE ECONOMICS OF MONEY, BANKING AND
EBK THE ECONOMICS OF MONEY, BANKING AND
4th Edition
ISBN: 9780100668201
Author: Mishkin
Publisher: YUZU
Question
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Chapter 24, Problem 23Q
To determine

To Explain: The reason why the self-correcting mechanism becomes non-operational when the policy rate hits the zero-lower bound

Concept Introduction

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.

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