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Fiscal policy in a small open economy with cross-border labor mobility

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  • Lim, Sokchea
  • Mahbub Morshed, A.K.M.

Abstract

The large and stable inflow of workers’ remittances through formal financial channels to developing countries prompted authorities to harness fiscal resources from this flow. This paper develops a macro-dynamic model of a small open economy with cross-border labor mobility emphasizing fiscal policy. The flow of remittances is the result of a household’s optimizing decision to migrate. We examine the macroeconomic responses to fiscal policies. First, we show that an economy with international migration is more resilient to demand shocks resulting from fiscal contraction. Second, the short-run association between remittances and domestic output depends on the sources of the shocks. Third, our results indicate that the equilibrium impact of a tax on remittances can be expansionary and welfare-improving when an economy is initially close to full employment. The presence of utility-enhancing government expenditure and a potential negative externality from over-allocation of labor abroad (over migration) justify the presence of distortionary taxes.

Suggested Citation

  • Lim, Sokchea & Mahbub Morshed, A.K.M., 2017. "Fiscal policy in a small open economy with cross-border labor mobility," Journal of Macroeconomics, Elsevier, vol. 52(C), pages 147-174.
    • Handle: RePEc:eee:jmacro:v:52:y:2017:i:c:p:147-174
    DOI: 10.1016/j.jmacro.2017.04.001
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    Cited by:

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    3. Lim, Sokchea & Khun, Channary, 2022. "Macroeconomic impacts of remittances: A two-country, two-sector model," Journal of Macroeconomics, Elsevier, vol. 73(C).
    4. Florencia Amábile & Rómulo A. Chumacero, 2023. "Should I stay or should I go?: the economic incentives of intergenerational taxes and transfers in Uruguay," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(2), pages 493-524, April.

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    More about this item

    Keywords

    Workers’ remittances; Small open economy; Cross-border labor mobility; Fiscal policy and migration;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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