Financial markets in Euroland differ from those of a national monetary union in two regards. First, capital markets in general and banking markets in particular show a greater degree of segmentation than national financial markets as a result of information costs and regulatory barriers to full...

We derive the optimal exchange rate policy for a small open economy subject to terms-of-trade shocks. Firm owners and workers are risk averse but workers more so. Wages are given or partially indexed in the short run, and capital markets are imperfect. The government sets the exchange rate to...