The Open-Economy ELB: Contractionary Monetary Easing and the Trilemma

Damiano Sandri and Paolo Cavallino

No 14683, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Contrary to the trilemma, we show that international financial integration can undermine the transmission of monetary policy even in countries with flexible exchange rates due to an open-economy Effective Lower Bound. The ELB is an interest rate threshold below which monetary easing becomes contractionary due to the interaction between capital flows and collateral constraints. A tightening in global monetary and financial conditions increases the ELB and may prompt central banks to hike rates despite output contracting. We also show that the ELB gives rise to a novel inter-temporal trade-off for monetary policy and calls for supporting monetary policy with additional policy tools.

Keywords: Monetary policy; Collateral constraints; Carry trade; Currency mismatches; Spillovers (search for similar items in EconPapers)
JEL-codes: E5 F3 F42 (search for similar items in EconPapers)
Date: 2020-04
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (5)

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Journal Article: The open-economy ELB: Contractionary monetary easing and the trilemma (2023)
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