Financial openness, financial frictions and optimal monetary policy
Increasing financial integratio nchallenges the optimal ityofinward-looking strategies for optimal monetary policy. Those issuesare analyzed in an open economy where foreign net lending, and the current account,are determined by a collateral constraint. Durables represent collateral. The urrent account features persistent imbalances, but can deliver a long run stationary equilibrium. The comparison between floating and managed exchange rate regimes shows that the impossible trinity is reversed: higher financial integration increases the persistence and volatility of the current account and calls for exchange rate stabilization. Inthiscontext, the Ramsey plan too prescribes stabilization of the exchangerate, along side with domestic inflation.