Citation

Discussion Paper Details

Please find the details for DP14683 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

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

Author(s): Paolo Cavallino and Damiano Sandri

Publication Date: April 2020

Keyword(s): carry trade, Collateral constraints, Currency mismatches, monetary policy and Spillovers

Programme Area(s): International Macroeconomics and Finance

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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14683

Bibliographic Reference

Cavallino, P and Sandri, D. 2020. 'The Open-Economy ELB: Contractionary Monetary Easing and the Trilemma'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14683