We show that rational but inattentive agents can become polarized, even in expectation. This is driven by agents’ choice of not only how much information to acquire, but also what type of information. We present how optimal information acquisition, and subsequent belief formation, depends...

Standard factor models focus on returns and leave prices undetermined. Thisapproach ignores information contained in the time-series of asset prices, relevantfor long-term investors and for detecting potential mispricing. To address this issue,we propose a novel (co-)integrated methodology to...

In real-life elections, vote-counting is often imperfect. We analyze the consequences of such imperfections in plurality and runoff rule voting games. We call a strategy profile a robust equilibrium if it is an equilibrium if the probability of a miscount is positive but small.All robust...

We study the joint dynamics of economic and political change. Predictions of the simple model that we formulate in the paper get considerable support in a panel of data on political regimes and GDP per capita for about 150 countries over 150 years. Democratic capital - measured by a nation's...

Do countries gain by coordinating their monetary policies if they have different economic structures? We address this issue in the context of a new open-economy macro model with a traded and a non-traded sector and more importantly, with a across-country asymmetry in the size of the traded...

We study how constrained fiscal policy can affect regional inflation and output in a two-region model of a monetary union with sticky prices and distortionary taxation. Both government expenditure and taxes can be used to stabilize regional variables; however, the best welfare outcome is...