The study asks how the potential benefits from cross-border asset trade are affected by the presence of non-traded income risk in incomplete markets. It is shown that the mean consumption growth may be lower with full integration than in financial autarky. This can occur because: the hedging...

A discretionary monetary policy leads to suboptimal stabilization in models with the New Keynesian assumption of forward-looking price setting, and various policy rules that improve the discretionary equilibrium have been considered in the literature. The empirical evidence for forward-looking...