Rising U.S. interest rates impact emerging economies through capital outflows and currency depreciations. For those with flexible exchange rates, the appropriate monetary policy response weighs the traditional competitiveness effect with a balance sheet effect created by the presence of foreign...

In this paper, I propose an optimal interest rate rule under heterogeneous expectations derived from a welfare criterion that is a second-order approximation of heterogeneous household utility following Di Bartolomeo et al. (2016). Additionally, I explore the agent level of the Branch and...