Professor Timothy Kehoe

CLA Economics
College of Liberal Arts
Twin Cities
Project Title: 
International Economics

Researchers in this group are working on five 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.
  • Gross Capital Flows and Incomplete Markets: This project studies the interaction of two-way international capital flows and non-tradable sector volatility. The researchers have built a dynamic model of two countries and solve for the equilibrium capital flows between the countries. Consistent with the data, the model predicts that an increase in volatility leads to a collapse in international capital flows. Using data for developed countries for the past 30 years, results show that the model is also consistent with the observation that net capital flows have been much more stable than gross capital flows.
  • Optimal Government Portfolio Choice: Previous research has argued that countries accumulate foreign reserves in order to deteriorate terms of trade to increase welfare. On the other hand, the optimal tariff theory argues that tariffs can increase the welfare of a country by improving its terms of trade. This project provides a plausible explanation for the different foreign reserves policies regarding terms of trade. The researchers are building an endogenous growth model of a small open economy with technological spillovers generated from exports. Internalizing the growth effects from these externalities, the government decides whether to accumulate foreign reserves or to borrow from abroad. This research finds that when the export externalities are large enough, it is optimal to hold positive foreign reserves to achieve faster growth through terms of trade deterioration. However, when the export externalities are small, the combined effects from the consumption smoothing motivation and better terms of trade outweigh the growth effects of exports, so the government holds negative foreign reserves.
  • 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
Gajendran Raveendranathan
Alexandra Solovyeva
Georgios Stefanidis
Guillaume Sublet
Lichen Zhang
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