Abstract
A model of investment market integrates financial intermediation theory with the monetary search framework. We use the model to explore in what circumstances that the central bank uses unconventional monetary policy rather than conventional monetary policy. Ferraris and Watanabe (2012) presents liquidity in investment market, and indicates the role of money to help ease liquidity shortage problems, but the article did not study the impact of the financial turmoil and monetary policy. Our article expands the model, considering the effect of the central bank using (un)conventional monetary policy to combat the financial crisis. We demonstrate that the direction of change of key variables - interest rate, the quantity of money, inflation, investment and consumption - is consistent with Gertler and Karadi (2011) of the DSGE model. In this paper we address the following findings. First, whether interest rates have touched ZLB depends on the bank lending channel. When bank lending willingness is low to zero and the central bank did not observe this phenomenon to constant use conventional monetary policy, it is more likely to fall into ZLB problem. Second, when interest rates are close to zero in conventional monetary policy and the bank credit can’t be loaned out, the quantity of money decreases; and further, deflationary pressure will occur. When interest rates are close to zero in unconventional monetary policy and the policy excludes the impact of bank lending channel, the quantity of money effectively increases; and further, deflationary pressure can be lifted. Third, when bank lending willingness is positive in a low inflation environment, both conventional and unconventional monetary policies affect the economy more effectively and bring about the quantity of money to increase. In addition, its increase is not only significantly to reduce the short-term interest rate, but also stimulates consumption and investment. Monetary policies are not effective in a high inflation environment. Though the quantity of money reduces short-term interest rates, consumption and investment come to a recess as a result of a high inflation. Besides, unconventional monetary policy can’t exit immediately, so it causes even larger(greater) damage than conventional monetary policy.