Recent empirical evidence shows that most international prices are sticky in dollars. This paper
studies the policy implications of this fact in the context of an open economy model, allowing for an
arbitrary structure of asset markets, general preferences and technologies, time- or state-dependent
price setting, and a rich set of shocks. We show that although monetary policy is less ecient
and cannot implement the exible-price allocation, ination targeting and a oating exchange rate
remain robustly optimal in non-U.S. economies. The capital controls cannot unilaterally improve the
allocation and are useful only when coordinated across countries. Thanks to the dominance of the
dollar, the U.S. can extract rents in international goods and asset markets and enjoy a higher welfare
than other economies. Although international cooperation benets other countries by improving
global demand for dollar-invoiced goods, it is not in the self-interest of the U.S. and may be hard to
sustain.
