In this paper, the following question is posed: Can the New Keynesian Open Economy Model by Galí and Monacelli (2005b) explain Six Major Puzzles in International Macroeconomicsʺ, as documented in Obstfeld and Rogoff (2000b)? The model features a small open economy with complete markets, Calvo...

We use a two-country model with a central bank maximizing union-wide welfare and two fiscal authorities minimizing comparable, but slightly different country-wide losses. We analyze the rivalry between the three authorities in seven static games. Comparing a homogeneous with a heterogeneous...