The Expansionary Lower Bound: Contractionary Monetary Easing and the Trilemma
Year: 2019
Type: preprint
Abstract: We provide a theory of the limits to monetary policy independence in open economies arising from the interaction between capital flows and domestic collateral constraints. The key feature is the existence of an "Expansionary Lower Bound" (ELB), defined as an interest rate threshold below which monetary easing becomes contractionary. The ELB can be positive, thus binding before the ZLB. Furthermore, the ELB is affected by global monetary and financial conditions, leading to novel international spillovers and crucial departures from Mundell's trilemma. We present two models in which the ELB may arise due to either carry-trade capital flows or currency mismatches.
Source: SSRN Electronic Journal
Authors: Paolo Cavallino, Damiano Sandri
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3135985993