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

Damiano Sandri and Paolo Cavallino

No 14683, CEPR Discussion Papers from Centre for Economic Policy Research

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
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://cepr.org/publications/DP14683 (application/pdf)

Related works:
Journal Article: The open-economy ELB: Contractionary monetary easing and the trilemma (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:14683

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP14683

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().