'It's the Challenger, Stupid!': Elections and the Theory of Rank-Order Tournaments

Democratic elections look very much like a contest where voters have to compare the candidates according to an ordinal ranking. Nevertheless, the theory of tournaments has not yet been applied to Political Economics. Therefore, we deploy tournament models to analyse elections. The main difference between tournaments in a firm and election tournaments is a systematic asymmetry between the contestants: whereas the voters have plenty of information about the incumbent, they hardly know anything about the challenger. Unlike most models of political accountability that model the challenger as a standard, we focus on the specific role of the challenger and model him as a random draw with a given expected ability. Consequently the ordinal ranking of the candidates contains plenty of noise, which weakens the incumbent's incentives to exert e€ort. After the presentation of the basic model, several extensions of the tournament theme in politics are explored. The model gives a fresh insight into very important aspects of politics, such as sabotage and selection, and it identifies exective policy reforms, e.g. the deregulation of politics

Optimal Monetary Policy in a Small Open Economy with Financial Frictions

I analyze how the introduction of financial frictions can affect the trade-off between output stabilization and inflation stability and whether, in the presence of financial frictions, the optimal outcome can be realized or approached more closely if monetary policy is allowed to react to aggregate financial variables. Moreover, I explore the issue of whether an inflation targeting cum exchange rate stabilization and a price-level targeting are more suitable rules in minimizing distortions generated by the presence of liabilities defined in foreign currency and in nominal terms. I find that, when the financial accelerator mechanism is working, a price-level targeting rule dominates. One caveat is that the source of the shock plays an important role. Once the financial shock is not operative, the gain from a price-level targeting rule decreases significantly