Inside Money, Investment, and Unconventional Monetary Policy
I develop a model that explicitly takes the role of financial institutions in the transmission mechanism of monetary policy into account. Within this model, I find various equilibrium environments, with one of them resembling a standard environment for monetary policy and another one akin to a liquidity trap. I analyze what the effects of various monetary policy measures such as quantitative easing, open market operations, helicopter money and negative interest rates are in all of these environments. I find that open market operations, quantitative easing, and negative interest rates on reserves are powerless in a liquidity trap, while helicopter money can be used to increase investment. The model also shows that a floor system allows a central bank to implement monetary policy with less side effects, but at the cost of losing control over inflation through open market operations.