Do financial frictions call for policy cooperation? This paper investigates the implications of financial frictions for monetary policy in the open economy. Welfare analysis shows that there are long-run gains which result from cooperation, but, dynamically, financial frictions per se do not require policy cooperation to improve global welfare over business cycles. In addition, inward-looking financial stability, namely eliminating inefficient fluctuations of loan premiums in its own country, is the optimal monetary policy in the open economy, irrespective of the existence of policy coordination.