The Expansionary Lower Bound: Contractionary Monetary Easing and the Trilemma
48 Pages Posted: 27 Feb 2019
Date Written: February 21, 2019
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
JEL Classification: E5, F3, F42
Suggested Citation: Suggested Citation