Professor Timothy Kehoe

Researchers in this group are working on three 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.
• 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. It is used to study how these decisions are affected by various education and labor market reforms.