ter Ellen, S., Jansen, E. and Midthjell, N.L. (2020). ECB Spillovers and domestic monetary policy effectiveness in small open economies European Economic Review, 121.

In this paper, we examine whether financial spillovers from the European Central Bank's monetary policy have consequences for the effectiveness of domestic monetary policy in three small open economies (SOEs) that are highly integrated with the European (Monetary) Union: Denmark, Norway, and Sweden. We find significant spillovers that are particularly strong for longer maturity yields. At the same time, domestic monetary policy in Norway and Sweden is effective for the shorter end of the yield curve, but much less so for the longer end of the curve. Recent work suggests that the trilemma in international economics as we used to know it, may be a dilemma: SOEs can only have effective monetary policies when the capital account is managed. Our results imply something in between: although spillovers impose challenges on domestic monetary policy effectiveness, small open economies still have some control over their yield curve.