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Financial Frictions And Optimal Monetary Policy In An Open Economy

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Executive Summary

A growing number of papers have studied positive and normative implications of financial frictions in DSGE models. The authors contribute to this literature by studying the welfare-based monetary policy in a two-country model characterized by financial frictions, alongside a number of key features, like capital accumulation, non-traded goods and foreign-currency debt denomination. They compare the cooperative Ramsey monetary policy with standard policy benchmarks (e.g. PPI stability) as well as with the optimal Ramsey policy in a currency area. They show that the two-country perspective offers new insights on the trade-offs faced by the monetary authority.

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