The open-economy ELB: Contractionary monetary easing and the trilemma

Paolo Cavallino and Damiano Sandri

Journal of International Economics, 2023, vol. 140, issue C

Abstract: Contrary to Mundell's trilemma, we show that free capital mobility may prevent monetary policy from ensuring output stability even if the exchange rate is flexible due to the existence of an Effective Lower Bound. The ELB is an interest rate threshold below which monetary easing becomes contractionary because of adverse effects on credit supply. A tightening in global monetary and financial conditions increases the ELB and may force central banks to hike rates even though domestic economic activity contracts. We also show that the ELB gives rise to a novel inter-temporal trade-off for monetary policy and calls for using a broad range of policy tools to restore monetary transmission.

Keywords: Monetary policy; Capital flows; Collateral constraints; Currency mismatches; Carry trade (search for similar items in EconPapers)
JEL-codes: E5 F3 F42 (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022199622001234
Full text for ScienceDirect subscribers only

Related works:
Working Paper: The Open-Economy ELB: Contractionary Monetary Easing and the Trilemma (2020)
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:eee:inecon:v:140:y:2023:i:c:s0022199622001234

DOI: 10.1016/j.jinteco.2022.103691

Access Statistics for this article

Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and Rodríguez-Clare, Andrés

More articles in Journal of International Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().