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Determinacy of equilibria in dynamic models with finitely many consumers
Kehoe, Timothy J.; Levine, David K.; Romer, Paul M. (1989)
We consider a production economy with a finite number of heterogeneous, infinitely lived consumers. We show that, if the economy is smooth enough, equilibria are locally unique for almost all endowments. We do so by converting the infinite-dimensional fixed point problem stated in terms of prices and commodities into a finite-dimensional Negishi problem involving individual weights in a social value function. By adding artificial fixed factors to utility and production functions, we can write the equilibrium conditions equating spending and income for each consumer entirely in terms of ...
Staff Report , Paper 118

Report
Sudden stops, sectoral reallocations, and the real exchange rate
Ruhl, Kim J.; Kehoe, Timothy J. (2008)
A sudden stop of capital flows into a developing country tends to be followed by a rapid switch from trade deficits to surpluses, a depreciation of the real exchange rate, and decreases in output and total factor productivity. Substantial reallocation takes place from the nontraded sector to the traded sector. We construct a multisector growth model, calibrate it to the Mexican economy, and use it to analyze Mexico's 1994?95 crisis. When subjected to a sudden stop, the model accounts for the trade balance reversal and the real exchange rate depreciation, but it cannot account for the ...
Staff Report , Paper 414

Journal Article
Openness and Growth: A Comparison of the Experiences of China and Mexico
Kehoe, Timothy J.; Xu, Xing (2025-08-27)
Quarterly Review , Volume 45 , Issue 2

Report
Self-fulfilling debt crises
Cole, Harold L.; Kehoe, Timothy J. (1998)
We characterize the values of government debt and the debt's maturity structure under which financial crises brought on by a loss of confidence in the government can arise within a dynamic, stochastic general equilibrium model. We also characterize the optimal policy response of the government to the threat of such a crisis. We show that when the country's fundamentals place it inside the crisis zone, the government is motivated to reduce its debt and exit the crisis zone because this leads to an economic boom and a reduction in the interest rate on the government's debt. We show that this ...
Staff Report , Paper 211

Report
The current financial crisis: what should we learn from the great depressions of the Twentieth Century?
Fernandez de Cordoba, Gonzalo; Kehoe, Timothy J. (2009)
Studying the experience of countries that have experienced great depressions during the twentieth century teaches us that massive public interventions in the economy to maintain employment and investment during a financial crisis can, if they distort incentives enough, lead to a great depression.
Staff Report , Paper 421

Working Paper
An evaluation of the performance of an applied general equilibrium model of the Spanish economy
Sancho, Ferran; Kehoe, Timothy J.; Polo, Clemente (1994)
In 1985?86 the authors were members of a team that constructed a static applied general equilibrium model that was used to analyze the impact on the Spanish economy of the 1986 fiscal reform, which accompanied Spain?s entry into the European Community. This paper compares the results obtained to recently published data for 1985?87; we find that the model performed well in predicting the changes in relative prices and resource allocation that actually occurred, particularly if we incorporate exogenous shocks that affected the Spanish economy in 1986. We also analyze the sensitivity of the ...
Working Papers , Paper 480

Report
Implications of Increasing College Attainment for Aging in General Equilibrium
Kehoe, Timothy J.; Nygaard, Vegard; Conesa, Juan Carlos; Raveendranathan, Gajendran (2019-05-08)
We 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 ...
Staff Report , Paper 583

Report
Gambling for redemption and self-fulfilling debt crises
Conesa, Juan Carlos; Kehoe, Timothy J. (2012)
We develop a model for analyzing the sovereign debt crises of 2010?2012 in the Eurozone. The government sets its expenditure-debt policy optimally. The need to sell large quantities of bonds every period leaves the government vulnerable to self-fulfilling crises in which investors, anticipating a crisis, are unwilling to buy the bonds, thereby provoking the crisis. In this situation, the optimal policy of the government is to reduce its debt to a level where crises are not possible. If, however, the economy is in a recession where there is a positive probability of recovery in fiscal ...
Staff Report , Paper 465

Report
Is It Too Late to Bail Out the Troubled Countries in the Eurozone?
Conesa, Juan Carlos; Kehoe, Timothy J. (2014-02-05)
In January 1995, U.S. President Bill Clinton organized a bailout for Mexico that imposed penalty interest rates and induced the Mexican government to reduce its debt, ending the debt crisis. Can the Troika (European Commission, European Central Bank, and International Monetary Fund) organize similar bailouts for the troubled countries in the Eurozone? Our analysis suggests that debt levels are so high that bailouts with penalty interest rates could induce the Eurozone governments to default rather than reduce their debt. A resumption of economic growth is one of the few ways that the Eurozone ...
Staff Report , Paper 497

Journal Article
Capturing NAFTA's impact with applied general equilibrium models
Kehoe, Patrick J.; Kehoe, Timothy J. (1994-04)
We examine the results of four static applied general equilibrium (AGE) modeling teams' analyses of the effects of NAFTA. What they show is that Mexico's economy, because it's the smallest, will see the biggest NAFTA-produced increase in economic welfare: from 2 to 5 percent of GDP. The U.S. welfare increase will be small, around 0.1 percent of GDP; Canada will notice no welfare increase due to NAFTA. We then discuss two examples of dynamic phenomena?labor force adjustment and capital flows?which are likely to influence NAFTA's welfare impact, but that aren't easy to incorporate into static ...
Quarterly Review , Volume 18 , Issue Spr , Pages 17-34

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