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International Economics

Abstract: 

International Economics

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

  • Consumer Credit and the U.S. Current Account Deficit: The U.S. current account deficit as a percentage of gross domestic product has increased. Most of the current account deficit of the U.S. is with China. In the meantime, U.S. consumer credit as a percentage of gross domestic product has also increased. The hypothesis tested for this project is that borrowing in the U.S. has become less constrained over time. This reduces the precautionary savings incentive in the U.S. leading to an increase in real interest rates. In equilibrium, China will save in the U.S. leading to an increase in the U.S. current account deficit and U.S. consumer credit. It has also been noted that Germany has a current account surplus. This project's general equilibrium model will have implications for Germany’s current account surplus as well as implications for welfare.
  • Welfare 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 under the Affordable Care Act. These expenses are forecast to outstrip revenue increases and lead to long-term structural federal deficits. These researchers construct and calibrate an integrated computable dynamic stochastic general equilibrium (CGE) model of the United States economy with both Federal Social Security and Health Care policies and estimate the effects on income, consumption, health, and economic growth of various policy scenarios that will lead to balancing their budgets. They then use the outcomes of the model to estimate the welfare effect of different policy scenarios. They will estimate both aggregate welfare and the welfare of subgroups by cohort, education, and initial health state.
  • Delays in Fiscal Adjustment in Sovereign Debt Crises: European debt ridden countries increased their borrowing, during the European debt crisis, despite worsening borrowing conditions. Standard models of sovereign debt crises predict spending responding more to the worsening borrowing conditions. That is, governments should have reduced expenditure or increased taxation in response to increasing spreads. The model developed here extends standard models by incorporating costly adjustment of spending, taken as a reduced form for political costs in reducing spending too quickly.
  • Learning about Debt Crises: The European debt crisis of 2008-2014 was marked with a surge in government bond yields on unprecedented scale among developed countries in modern history. The peak of this crisis occurred with a significant lag following the initial shocks to output, even though governments did not undertake the fiscal adjustments necessary to prevent a further increase in default risk. I show that these observations are at odds with the predictions of existing sovereign debt models and propose a new theory that features incomplete (symmetric and asymmetric) information about the country's economic outlook. The delay arises as a result of the markets' learning process, while the government optimally postpones debt reduction in order not to send a negative signal about the underlying state of the economy.

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Group name: 
kehoet

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