The majority of households across emerging market economies are excluded from the financial markets and cannot smooth consumption. I analyze the implications of this for optimal monetary policy and the corresponding choice of domestic versus external nominal anchor in a small open economy...

This paper provides a new benchmark for the analysis of the international diversification puzzle in a tractable new open economy macroeconomic model. Building on Cole and Obstfeld (1991) and Heathcote and Perri (2009), this model specifies an equilibrium model of perfect risk sharing in...