European Parliament Library

The Expansionary Lower Bound: Contractionary Monetary Easing and the Trilemma, Paolo Cavallino, Damiano Sandri

Contributor
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
Table Of Contents
Cover -- The Expansionary Lower Bound: Contractionary Monetary Easing and the Trilemma -- 1 Introduction -- 2 The ELB under carry-trade capital flows -- 2.1 Model setup -- 2.1.1 Household and corporate sector -- 2.1.2 Banking sector -- 2.1.3 Foreign investors -- 2.1.4 Public sector and market clearing -- 2.2 Model equilibrium -- 2.2.1 Model equilibrium at time 1 -- 2.2.2 Model equilibrium at time 0 -- 2.3 Policies to escape the ELB -- 3 The ELB and currency mismatches -- 3.1 Model setup -- 3.2 Model equilibrium -- 3.2.1 Model equilibrium at time 1 -- 3.2.2 Model equilibrium at time 0 -- 3.3 Policies to escape the ELB -- 4 Conclusion -- References -- Appendis -- A: Generalization of the model with carry traders -- B Generalization of the model with currency mismatches
Language
eng
Literary Form
non fiction
Physical Description
1 online resource (47 pages)
Specific Material Designation
remote
Form Of Item
online
Isbn
9781513510682

Library Locations

  • EP Library Luxembourg

    Rue du Fort Thüngen, Luxembourg, L-1313, LU
    Borrow
  • EP Library Strasbourg

    7 Place Adrien Zeller, Allée du Printemps, Strasbourg, F-67070, FR
    Borrow
  • EP Library Brussels

    60 rue Wiertz, Brussels, B-1047, BE
    Borrow