Professor Timothy Kehoe

Project Title: 
International Economics

Researchers in this group are working on four projects using MSI:

  • Macroeconomic Effects of Balancing the Federal Social Security and Health-Care Budgets: Under current laws, spending on Social Security, Medicare, and Medicaid is projected to rise due to population aging, rising health care costs, and the expansion of Medicaid and health insurance subsidies. These expenses are forecast to lead to long-term structural federal deficits. These researchers are constructing and calibrating an integrated computable dynamic stochastic general equilibrium (CGE) model of the United States economy that features Social Security, and private and public health insurance. They use the model to estimate the effects on income, consumption, health, economic growth, government spending, and welfare of various policy scenarios such as an aging population and rising health care costs.
  • Causes and Consequences of Life Expectancy Inequality: The richest 25 percent of Americans can expect to live 7 years longer than the poorest 25 percent. This project develops a structural life-cycle model with incomplete markets and heterogeneous agents to study how policies can be designed to reduce life expectancy inequality. In the model, agents’ health evolves endogenously depending on their consumption of healthy and unhealthy goods. Consistent with the data, health has implications for mortality risk, medical expenditure risk, and labor market outcomes. This research will show that the model can account for the considerable dispersion in the population health distribution that is documented using an objective measure of health called a frailty index. To illustrate, the sickest 25 percent of 20-year-olds have a worse objective health score than the healthiest 25 percent of 50-year-olds, even though the former group is 30 years younger than the latter. The model is then used to study the implications of health insurance and income tax reforms for life expectancy inequality, the macroeconomy, and welfare. Universal health insurance should lead to higher life expectancy, lower life expectancy inequality, lower healthcare spending, higher GDP per capita, and generate large welfare gains, even after controlling for the increased tax burden needed to finance the reform. Similarly, research shows that the government can lower life expectancy inequality by increasing redistribution through income tax reforms, but that such reforms can have adverse implications for GDP per capita.
  • Implications of Increasing College Attainment for Aging in General Equilibrium: This project will develop and calibrate an overlapping generations general equilibrium model of the U.S. economy with heterogeneous consumers who face idiosyncratic earnings and health risk to study the implications of exogenous trends in increasing college attainment, decreasing fertility, and increasing longevity between 2005 and 2100. While all three trends contribute to a higher old-age dependency ratio, increasing college attainment has different macroeconomic implications because it increases labor productivity. Decreasing fertility and increasing longevity require the government to increase the average labor tax rate from 32.0 to 44.4 percent. Increasing college attainment lowers the required tax increase by 10.1 percentage points. The required tax increase is higher under general equilibrium than in a small open economy with a constant interest rate because the reduction in the interest rate lowers capital income tax revenues.
  • A Model of Education and Occupation Choice: This project develops a dynamic discrete choice model where agents make educational decisions before entering the labor market. Agents' decisions affect how their skills accumulate or depreciate over time. The model is calibrated to match observed educational and occupational choices in the United States. The model is used to study how these decisions are affected by various education and labor market reforms.

Project Investigators

Fernando Arce Munoz
Parisa Jalalkamali
Professor Timothy Kehoe
Kaja Kierulf
Sora Lee
Hyunju Lee
Jorge Mondragon Minero
Vegard Nygaard
Radek Paluszynski
Alexandra Solovyeva
Georgios Stefanidis
Guillaume Sublet
Lichen Zhang
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