The paper builds a two-country model of a monetary union with home bias and price stickiness. Incompleteness of financial asset markets is allowed. In this environment, we derive the solution for optimal behavior by the monetary policymaker and show that welfare can be higher under incomplete...

This paper shows that introducing habit persistence in a limited participation model allows to reproduce a persistent liquidity effect. Furthermore, the decomposition of the monetary effects on nominal interest rate allows to isolate the liquidity premium defined by Fuerst [1992]. Then, we show...