Governments in emerging markets often behave like a "tormented insurer" who tries to smooth government outlays given the randomness of public revenues and in a challenging world in which "liability dollarization" requires them to issue debt denominated in hard currencies, or indexed to tradable...

This paper studies optimal monetary policy in a small open economy under flexible prices. The paper’s key innovation is to analyze this question in the context of environments where only a fraction of agents participate in asset market transactions (i.e., asset markets are segmented). In...