IDEAS home Printed from https://ideas.repec.org/p/bis/biswps/770.html
   My bibliography  Save this paper

The expansionary lower bound: contractionary monetary easing and the trilemma

Author

Listed:
  • Paolo Cavallino
  • Damiano Sandri

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.

Suggested Citation

  • Paolo Cavallino & Damiano Sandri, 2019. "The expansionary lower bound: contractionary monetary easing and the trilemma," BIS Working Papers 770, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:770
    as

    Download full text from publisher

    File URL: https://www.bis.org/publ/work770.pdf
    File Function: Full PDF document
    Download Restriction: no

    File URL: https://www.bis.org/publ/work770.htm
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Yusuf Soner Baskaya & Julian di Giovanni & Sebnem Kalemli-Özcan & Mehmet Fatih Ulu, 2017. "International spillovers and local credit cycles," Economics Working Papers 1559, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2017.
    2. Robert N. McCauley & Patrick McGuire & Vladyslav Sushko, 2015. "Global dollar credit: links to US monetary policy and leverage," Economic Policy, CEPR;CES;MSH, vol. 30(82), pages 187-229.
    3. Caballero, Julian & Panizza, Ugo & Powell, Andrew, 2015. "The second wave of global liquidity: Why are firms acting like financial intermediaries?," CEPR Discussion Papers 10926, C.E.P.R. Discussion Papers.
    4. Nicolas Arregui & Selim Elekdag & R. G Gelos & Romain Lafarguette & Dulani Seneviratne, 2018. "Can Countries Manage Their Financial Conditions Amid Globalization?," IMF Working Papers 18/15, International Monetary Fund.
    5. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Georgios Georgiadis & Feng Zhu, 2019. "Monetary policy spillovers, capital controls and exchange rate flexibility, and the financial channel of exchange rates," BIS Working Papers 797, Bank for International Settlements.
    2. Salih Fendoğlu & Eda Gülşen & José-Luis Peydró, 0000. "Global liquidity and impairment of local monetary policy," Economics Working Papers 1680, Department of Economics and Business, Universitat Pompeu Fabra.
    3. Agur, Itai, 2019. "Monetary and macroprudential policy coordination among multiple equilibria," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 192-209.
    4. repec:bkr:journl:v:78:y:2019:i:3:p:89-121 is not listed on IDEAS

    More about this item

    Keywords

    monetary policy; collateral constraints; currency mismatches; carry trade; spillovers;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bis:biswps:770. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Beslmeisl). General contact details of provider: http://edirc.repec.org/data/bisssch.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.