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 investigates the consequences of US external imbalances on European economies using a three-country dynamics general equilibrium model. In the model, US external debt is simulated by means of a growth differential together with an exogenous shock on US external borrowing. This...