Score contribution per author:
α: calibrated so average coauthorship-adjusted count equals average raw count
This paper studies utility‐maximizing monetary policy in a two‐country economy with consumer search frictions. Search frictions provide a microfoundation for incomplete exchange rate pass‐through and international deviations from the law of one price (LOP). I show that optimal interest rate policy targets deviations from the LOP and acts to mitigate the effect of search frictions. In a quantitative setting, with internationally correlated technology and preference shocks, optimal policy generates positive cross‐country correlation of nominal interest rates.