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Should I stay or should I go? Austerity, unemployment and migration

Author

Listed:
  • Guilherme Bandeira

    (Banco de España)

  • Jordi Caballé

    (Universitat Autònoma de Barcelona and Barcelona GSE)

  • Eugenia Vella

    (Move, Universitat Autònoma de Barcelona, and University of Sheeld)

Abstract

High unemployment and fiscal austerity during the Great Recession have led to significant migration outflows in those European countries that suffered a deep deterioration of their economy, Greece being the most obvious case. This paper introduces endogenous migration in a small open economy DSGE model to analyze the business cycle effects from the interaction of fiscal consolidation instruments with migration. A tax-based consolidation induces the strongest increase in emigration, leading to the highest costs in terms of aggregate GDP and unemployment in the medium run. As a result, the unemployment gains from migration are only temporary. However, in terms of per capita GDP, cuts in the components of public spending that are either productive or utility-enhancing can lead to a deeper contraction than tax hikes or wasteful spending cuts. The introduction of potential migration by the employed implies even higher unemployment costs, a deeper demand contraction, and an increase in both the tax hike and the time required to achieve the same size of fiscal consolidation.

Suggested Citation

  • Guilherme Bandeira & Jordi Caballé & Eugenia Vella, 2018. "Should I stay or should I go? Austerity, unemployment and migration," Working Papers 1839, Banco de España.
  • Handle: RePEc:bde:wpaper:1839
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    References listed on IDEAS

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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Should I stay or should I go? Austerity, unemployment and migration
      by Christian Zimmermann in NEP-DGE blog on 2018-11-29 14:27:31

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    Cited by:

    1. Daniela Hauser & Martin Seneca, 2019. "Labor Mobility in a Monetary Union," Staff Working Papers 19-15, Bank of Canada.

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    More about this item

    Keywords

    fiscal consolidation; migration; matching frictions; on-the-job search;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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