What does financial globalization imply for the design of monetary policy? Does the case for price stability change in an environment of large cross country gross asset holdings? This paper is concerned with the effects of monetary policy under endogenous international portfolio choice and...

This paper explores the effect of global shocks in a two-country New Keynesian model in which US government debt has an advantage as a superior collateral asset in the balance sheets of banks. We show that the model can account for the observed response of the US dollar and US bond returns to a...