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.
  • Health Inequality: This project studies how inequality in income and insurance coverage affects medical spending and mortality. The research is motivated by the observations that higher income is associated with greater longevity throughout the income distribution; that low-income individuals are less likely to have health insurance; and that low-income individuals are less likely to invest in health behavior. The project first develops a general equilibrium overlapping generations model with idiosyncratic earnings risk and incomplete markets that can account for these facts. In the model, agents can affect their mortality risk through medical spending and through investments in health behavior. The model is then calibrated to match medical spending, survival rates, and insurance take-up rates by age and income in the United States. Lastly, the model is run for counterfactual experiments, which in turn show how medical spending and life expectancy are affected by changes in income inequality and by changes in insurance coverage.
  • 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: This project develops a sovereign default model with two assets to study the government's optimal portfolio choice between bonds and foreign reserves. The government accumulates both assets to hedge against risk premium shocks. In particular, the government uses its stock of foreign reserves to hedge against fluctuations in bond prices caused by currency fluctuations. The model is consistent with empirical findings that show that governments tend to lower their stock of foreign reserves during currency crises.
  • 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 Kamali
Professor Timothy Kehoe
Kaja Kierulf
Hyunju Lee
Sora Lee
Vegard Nygaard
Radek Paluszynski
Gajendran Raveendranathan
Alexandra Solovyeva
Georgios Stefanidis
Guillaume Sublet
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