This paper examines the coordination of monetary policy and an interest-equalization tax stabilizer within a two-country macroeconomic model. Within this two-country framework, which allows for wage indexation and includes an imported intermediate good, monetary policy is shown to be severely...

This paper uses a forward-looking open-economy optimizing model to show that the existence of a real exchange rate channel in the Phillips Curve dramatically alters the conduct of optimal monetary policy. The central bank's optimal reaction function can produce a "lean with the wind" response to...