Professor Timothy Kehoe

CLA Economics
College of Liberal Arts
Twin Cities
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.
  • The Rise in Unsecured Credit and Consumer Bankruptcies: This research studies how improved matching between borrowers and lenders quantitatively explains the rise in unsecured credit and consumer bankruptcies in the United States. In a model of unsecured credit, this change is studied as an increase in the matching efficiency of directed search. The model is calibrated to match the increase in the population with access to unsecured credit. The calibration results show that the increase in the matching efficiency accounts for more than 60 percent of the rise in unsecured credit and 80 percent of the rise in consumer bankruptcies. Furthermore, this explanation is consistent with the observed behavior of measures such as the charge-off rate and the (cross-sectional) average spread. This project also explores three alternative explanations: a decrease in the cost of bankruptcy; a decrease in the lending fee; and an increase in the lender’s information about the borrower’s characteristics. These explanations also lead to an increase in unsecured credit and consumer bankruptcies. However, these explanations are not consistent with the observed behavior of the (cross-sectional) average spread.
  • Medical Bankruptcy: A Rationale for Uninsurance?: This project studies whether the ability to file for medical bankruptcy affects households' demand for private insurance. The researchers have developed a general equilibrium life-cycle model that incorporates several features of the U.S. health insurance system and Chapter 7 of the U.S. bankruptcy code. The model is used to study the effects of an unexpected elimination of Chapter 7. This policy reform enables the researchers to quantify the effects of Chapter 7 on the private insurance take-up rate, Medicaid enrollment, welfare, and macroeconomic aggregates.
  • 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.

Project Investigators

Parisa Kamali
Professor Timothy Kehoe
Kaja Kierulf
Hyunju Lee
Vegard Nygaard
Radek Paluszynski
Gajendran Raveendranathan
Alexandra Solovyeva
Georgios Stefanidis
Guillaume Sublet
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