{
  "title": "The Expansionary Lower Bound: Contractionary Monetary Easing and the Trilemma",
  "publication": "IMF Working Papers, November 2, 2018",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2018/11/02/the-expansionary-lower-bound-contractionary-monetary-easing-and-the-trilemma-46307",
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  "summary": "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.",
  "sections": [
    {
      "heading": "Summary of core argument",
      "content": "- The paper provides a theory of the limits to monetary policy independence in open economies arising from the interaction between capital flows and domestic collateral constraints.\n- Introduces the concept of an “Expansionary Lower Bound” (ELB), defined as an interest rate threshold below which monetary easing becomes contractionary.\n- The ELB can be positive, thus acting as a more stringent constraint than the Zero Lower Bound.\n- The ELB is affected by global monetary and financial conditions, generating international spillovers and departures from Mundell’s trilemma.\n- Two model frameworks are presented where the ELB may arise:\n  - Model 1: Carry-trade capital flows.\n  - Model 2: Role of currency mismatches."
    },
    {
      "heading": "Key findings and mechanisms",
      "content": "- Existence of ELB:\n  - Monetary easing can become contractionary if interest rates fall below the ELB.\n  - The ELB can be above zero (positive), implying a more binding constraint than the Zero Lower Bound.\n- International spillovers:\n  - Global monetary and financial conditions influence the ELB, creating cross-border transmission of constraints and policy limits.\n- Channels analyzed:\n  - Carry-trade capital flows can interact with domestic collateral constraints to produce an ELB.\n  - Currency mismatches amplify vulnerabilities and can generate ELB dynamics through balance-sheet and collateral effects."
    },
    {
      "heading": "Policy implications and relevance",
      "content": "- Monetary policy independence is limited by interactions between capital flows and domestic financial frictions.\n- Standard policy prescriptions based on Mundell’s trilemma require revision when ELB effects are present, because policy space can be more constrained than implied by nominal interest rate bounds alone.\n- Policymakers should account for global financial conditions and balance-sheet vulnerabilities (including currency mismatches) when setting policy rates to avoid contractionary outcomes from monetary easing.\n\n---\n\n Content in this bundle\n\n- wp18236\n  - wp18236 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp18236 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2018/11/02/the-expansionary-lower-bound-contractionary-monetary-easing-and-the-trilemma-46307"
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    "Authors: Paolo Cavallino, Damiano Sandri",
    "Published: November 2, 2018",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781484381618.001",
    "The paper provides a theory of the limits to monetary policy independence in open economies arising from the interaction between capital flows and domestic collateral constraints.",
    "Introduces the concept 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.",
    "The ELB is affected by global monetary and financial conditions, generating international spillovers and departures from Mundell’s trilemma.",
    "Two model frameworks are presented where the ELB may arise:",
    "Existence of ELB:",
    "International spillovers:",
    "Channels analyzed:",
    "Monetary policy independence is limited by interactions between capital flows and domestic financial frictions.",
    "Standard policy prescriptions based on Mundell’s trilemma require revision when ELB effects are present, because policy space can be more constrained than implied by nominal interest rate bounds alone.",
    "Policymakers should account for global financial conditions and balance-sheet vulnerabilities (including currency mismatches) when setting policy rates to avoid contractionary outcomes from monetary easing.",
    "**wp18236**"
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