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The expansionary lower bound: contractionary monetary easing and the trilemma

Paolo Cavallino and Damiano Sandri

No 770, BIS Working Papers from Bank for International Settlements

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.

Keywords: monetary policy; collateral constraints; currency mismatches; carry trade; spillovers (search for similar items in EconPapers)
JEL-codes: E5 F3 F42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
Date: 2019-02
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