Creator: Bergoeing, Raphael, Kehoe, Patrick J., Kehoe, Timothy Jerome, 1953-, and Soto, Raimundo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 292 Abstract:
Chile and Mexico experienced severe economic crises in the early 1980s. This paper analyzes four possible explanations for why Chile recovered much faster than did Mexico. Comparing data from the two countries allows us to rule out a monetarist explanation, an explanation based on falls in real wages and real exchange rates, and a debt overhang explanation. Using growth accounting, a calibrated growth model, and economic theory, we conclude that the crucial difference between the two countries was the earlier policy reforms in Chile that generated faster productivity growth. The most crucial of these reforms were in banking and bankruptcy procedures.
Keyword: Total factor productivity, Depression, Growth accounting, Mexico, and Chile Subject (JEL): N16 - Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: Latin America; Caribbean, O40 - Economic Growth and Aggregate Productivity: General, and E32 - Business Fluctuations; Cycles
Creator: Cole, Harold Linh, 1957- and Kehoe, Timothy Jerome, 1953- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 210 Abstract:
This paper explores the extent to which the Mexican government's inability to roll over its debt during December 1994 and January 1995 can be modeled as a self-fulfilling debt crisis. In the model there is a crucial interval of debt for which the government, although it finds it optimal to repay old debt if it can sell new debt, finds it optimal to default if it cannot sell new debt. If government debt is in this interval, which we call the crisis zone, then we can construct equilibria in which a crisis can occur stochastically, depending on the realization of a sunspot variable. The size of this zone depends on the average length of maturity of government debt. Our analysis suggests that for a country, like Mexico, with a very short maturity structure of debt, the crisis zone is large and includes levels of debt as low as that in Mexico before the crisis.
Keyword: Sunspot, Debt crisis, and Mexico Subject (JEL): E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, H63 - National Debt; Debt Management; Sovereign Debt, and F34 - International Lending and Debt Problems
Creator: Kehoe, Timothy Jerome, 1953- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 320 Abstract:
This paper evaluates the performances of three of the most prominent multisectoral static applied general equilibrium models used to predict the impact of the North American Free Trade Agreement. These models drastically underestimated the impact of NAFTA on North American trade. Furthermore, the models failed to capture much of the relative impacts on different sectors. Ex-post performance evaluations of applied GE models are essential if policymakers are to have confidence in the results produced by these models. Such valuations also help make applied GE analysis a scientific discipline in which there are well-defined puzzles with clear successes and failures for competing theories. Analyzing sectoral trade data indicates the need for a new theoretical mechanism that generates large increases in trade in product categories with little or no previous trade. To capture changes in macroeconomic aggregates, the models need to be able to capture changes in productivity.
Creator: Kehoe, Timothy Jerome, 1953-, Polo, Clemente, and Sancho, Ferran Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 480 Abstract:
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 results to alternative specifications of the labor market and macroeconomic closure rules; we find that the central results are robust.
Creator: Kehoe, Timothy Jerome, 1953- and Ruhl, Kim J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 391 Abstract:
International trade is frequently thought of as a production technology in which the inputs are exports and the outputs are imports. Exports are transformed into imports at the rate of the price of exports relative to the price of imports: the reciprocal of the terms of trade. Cast this way, a change in the terms of trade acts as a productivity shock. Or does it? In this paper, we show that this line of reasoning cannot work in standard models. Starting with a simple model and then generalizing, we show that changes in the terms of trade have no first-order effect on productivity when output is measured as chain-weighted real GDP. The terms of trade do affect real income and consumption in a country, and we show how measures of real income change with the terms of trade at business cycle frequencies and during financial crises.
Keyword: Terms of trade, Gross domestic product, Total factor productivity, and National income accounting Subject (JEL): F41 - Open Economy Macroeconomics, E23 - Macroeconomics: Production, and F43 - Economic Growth of Open Economies
Creator: Kehoe, Timothy Jerome, 1953- and Levine, David K. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 380 Abstract:
Typical models of bankruptcy and collateral rely on incomplete asset markets. In fact, bankruptcy and collateral add contingencies to asset markets. In some models, these contingencies can be used by consumers to achieve the same equilibrium allocations as in models with complete markets. In particular, the equilibrium allocation in the debt constrained model of Kehoe and Levine (2001) can be implemented in a model with bankruptcy and collateral. The equilibrium allocation is constrained efficient. Bankruptcy occurs when consumers receive low income shocks. The implementation of the debt constrained allocation in a model with bankruptcy and collateral is fragile in the sense of Leijonhufvud’s “corridor of stability,” however: If the environment changes, the equilibrium allocation is no longer constrained efficient.
Subject (JEL): D61 - Allocative Efficiency; Cost-Benefit Analysis, D52 - Incomplete Markets, D50 - General Equilibrium and Disequilibrium: General, and G13 - Contingent Pricing; Futures Pricing; option pricing
Creator: Kehoe, Timothy Jerome, 1953- and Meza, Felipe Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 693 Abstract:
In 1950 Mexico entered an economic takeoff and grew rapidly for more than 30 years. Growth stopped during the crises of 1982–1995, despite major reforms, including liberalization of foreign trade and investment. Since then growth has been modest. We analyze the economic history of Mexico 1877–2010. We conclude that the growth 1950–1981 was driven by urbanization, industrialization, and education and that Mexico would have grown even more rapidly if trade and investment had been liberalized sooner. If Mexico is to resume rapid growth — so that it can approach U.S. levels of income — it needs further reforms.
Keyword: Total factor productivity, Mexico, and Economic growth Subject (JEL): O54 - Economywide Country Studies: Latin America; Caribbean, N16 - Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: Latin America; Caribbean, and O11 - Macroeconomic Analyses of Economic Development
Creator: Kehoe, Timothy Jerome, 1953- Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 460 Abstract:
Economic equilibria are usually solutions to fixed point problems rather than solutions to convex optimization problems. This leads to two difficulties that are closely related: First, equilibria may be difficult to compute. Second, a model economy may have more than one equilibrium. This paper explores these issues for a number of stylized economies, including static economies that involve both pure exchange and production, economies that have infinite numbers of goods because of time and uncertainty, and economies with distortionary taxes and externalities. There are numerous numerical examples that illustrate the theory and could serve as test problems for algorithms.
Creator: Kehoe, Timothy Jerome, 1953- and Levine, David K. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 445 Abstract:
We develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature. If an agent defaults on a contract, he can be excluded from future contingent claims markets trading and can have his assets seized. He cannot be excluded from spot markets trading, however, and he has some private endowments that cannot be seized. All information is publicly held and common knowledge, and there is a complete set of contingent claims markets. Since there is complete information, an agent cannot enter into a contract in which he would have an incentive to default in some state. In general there is only partial insurance: variations in consumption may be imperfectly correlated across agents; interest rates may be lower than they would be without constraints; and equilibria may be Pareto ranked.