We study a credible Markov-perfect monetary policy in an open New Keynesian economy with incomplete financial markets. We demonstrate the existence of two discretionary equilibria. Following a shock the economy can be stabilised either "quickly" or "slow", both dynamic paths satisfy conditions...

The adoption of a Taylor-type monetary policy rule and an inflation target for emerging market economies that choose a flexible exchange rate regime is often advocated. This paper investigates the issue of exchange rate determination when interest-rate feedback rules are implemented in a...

We use a two-country New Keynesian model with financial frictions and dollar debt in balance sheets to investigate the foreign effects of U.S. monetary policy. Financial amplification works through an endogenous deviation from uncovered interest parity (UIP) arising from limits to arbitrage in...

This paper extends the Gerali et al. (2010) model to an open economy framework with dual-currency banking and endogenously determined dollarization. The model incorporates a portfolio allocation problem in households' and entrepreneurs' decisions, so that they choose optimal currency structure...