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 this...

We document the divergence of per capita incomes across states in India between 1960 and 1996. We find that differences in the evolution of state-specific productivity can account for most of the observed increase in income disparities across Indian states during this period.

We calibrate the model to match the business cycle regularities of emerging economies. We then conduct policy experiments involving the domestic interest rate and demonstrate the central result of the paper: the relationship between interest rates and exchange rates is non-monotonic. We find...