LANCE KENTassistant professor of economics

I research the macroeconomic causes and effects of political instability and other large rare events, the international transmission of business cycles, and the process by which people form expectations.

CV (April 23 2016)

Department of Economics
College of William and Mary
115 Morton Hall
Williamsburg, VA 23185

Capital Flows: Convergence vs. Risk

revisions resubmitted [draft] Standard international macroeconomic models overpredict capital flows into countries with relatively lower capital stocks and faster-growing TFP. Asymmetric investment risk has been shown in similar models to be a significant driver of capital flows between otherwise symmetric countries. But can risk drive capital “uphill?” This paper builds a model with two large open economies to assess the ability of asymmetric aggregate risk to partially counteract the neoclassical convergence forces. The two economies are calibrated to the average 1980 capital stocks, TFP levels, and trend TFP growth rates of a group of 21 developed markets and a group of 21 emerging markets, respectively. In addition, the two economies’ TFP processes are subject to both transitory Gaussian shocks and rare disasters, both calibrated to evidence that emerging markets are not just more volatile, but are additionally subject to rare disasters that are both more common and more severe than those in developed markets. At the baseline calibration, risk is able to prevent 82% of the flows that would have occurred due to the convergence forces, and if the initial gap in capital per worker and TFP in the average emerging market were 61% that which was observed in the data, the risk motive would exactly offset the convergence forces. This paper concludes that the literature’s insights on the first-order importance of risk remain relevant even in a setting where powerful countervailing forces would drive capital “downhill.”

Bilateral Linkages and the Dynamics of International Business Cycle Comovement

in submission [draft] This paper uses uses a novel type of panel vector autoregression to establish that the well-known association between linkages and business cycle comovement has both intratemporal and intertemporal dimensions. When two countries are more closely linked (i.e., they trade more or hold more financial assets in each other), business-cycle fluctuations in one country have greater dynamic spillovers in the other. The association between linkages and dynamic spillovers varies across types of good traded, types of assets held, and whether the spillovers are traveling upstream or downstream. Import and export intensity are asymmetrically associated with spillovers; bilateral portfolio equity holdings are associated with comovement within quarters (but not at a delay of a quarter); the import of goods used for capital formation is strongly associated with spillovers both within quarters and at a delay of a quarter. The novel stylized facts shed new light on mechanisms for the international transmission of shocks in commonly used business cycle models: several mechanisms which the literature has found to strengthen the relationship between trade and business cycle correlation do not give rise to the intertemporal spillovers found in the data.

Political Unrest, Time-Varying Risk, and Macroeconomic Activity

with Toan Phan in submission [draft] We provide a novel method to identify and estimate shocks to higher-order moments of business cycles, by exploiting the uncertainty associated with episodes of political unrest. Unrest episodes are usually lengthy periods during which the growth rates of macroeconomic activities are lower on average, significantly more volatile and more negatively skewed. We augment and calibrate a standard small-open-economy real business cycles model with Markov switching to the estimated moments. The model shows that increased negative skewness plays an important role in explaining the observed average decline in economic activities, and has a similar effect as an increase in the probability of a rare disaster.

Unrest Before Democratization: Theory and Evidence

with Toan Phan and Stanislav Rabinovich We document that most democratic transitions are preceded by episodes of mass political unrest by non-state actors with the goal of regime change. These episodes are associated with significant economic losses, do not always succeed in changing the regime, and can lead to negative polity changes. We then develop a unifying model of democratic transitions in which some non-democracies are consolidated, some democratic transitions are preceded by preemptive franchise extensions and some by equilibrium revolutions.

Relaxing Rational Expectations

[draft] The assumption of rational expectations is potentially a serious source of misspecification in DSGE models. Many recent theories of expectations formation have relaxed rational expectations and improved the predictive properties of benchmark macroeconomic models. Problematically, the space of possible theoretical deviations from rational expectations is very large, especially since the aggregate consequences of deviations from rational expectations in equilibrium may not be directly measurable using existing surveys of expectations. This paper provides evidence on which small reduced-form state-contingent deviations from rational expectations yield the most improvement in replicating features of macroeconomic time series, and which aspects of model misspecification are and are not ameliorated by these small deviations from rational expectations. The findings: a) The data favor deviations from rational expectations among firms in which they over-estimate the persistence of inflation. b) Relaxing rational expectations in a New Keynesian model partially substitutes for the additional structural mechanisms in the larger Smets Wouters (2007) model. Relaxing rational expectations within the Smets Wouters (2007) model improves that model’s ability to reproduce some of the spectral coherencies between output growth, investment growth, and labor supply. The mechanism is a combination of shocks to beliefs themselves and the role that deviations from rational expectations have in changing the propagation of other shocks.

Protest and Repression: a Model of the Arab Spring

Optimal Monetary Policy and Haircuts on Sovereign Debt

The Cyclicality of Optimal Macroprudential Capital Controls: Evidence from M&A Data

Inflation Expectations: Models vs. Financial Data

Institutions and Business Cycles

Course Materials are available on Blackboard.

ECO 304: Intermediate Macroeconomic Theory

ECO 411: Advanced Macroeconomics

ECO 476: International Finance and Open Economy Macroeconomics