The Expansionary Lower Bound: Contractionary Monetary Easing and the Trilemma

Paolo Cavallino and Damiano Sandri

No 2018/236, IMF Working Papers from International Monetary Fund

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 of our theory 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 acting as a more stringent constraint than the Zero Lower Bound. 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 under which the ELB may arise, the first featuring carry-trade capital flows and the second highlighting the role of currency mismatches.

Keywords: WP; monetary policy; exchange rate; central bank; collateral constraints; currency mismatches; carry trade; spillovers; ELB constraint; credit crunch; monetary policy stance; open economy; ELB call; ELB rise; monetary policy independence; existence of an Expansionary Lower Bound; policy rate response; monetary policy in EMs; monetary policy rate; Interest rate floor; Central bank policy rate; Sovereign bonds; Exchange rates; Capital flows; Global (search for similar items in EconPapers)
Pages: 46
Date: 2018-11-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=46307 (application/pdf)

Related works:
Working Paper: The expansionary lower bound: contractionary monetary easing and the trilemma (2019)
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:imf:imfwpa:2018/236

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().