European temporary migration in a two country DSGE model

Free movement of labour across borders can influence business cycle dynamics in the affected countries. This paper studies the macroeconomic implications of temporary migration using a two-country dynamic stochastic general equilibrium model calibrated to represent the “old” EU Member States (EU15) and the “new” Member States (NMS12). The model introduces fully endogenous temporary migration and combines it with search-and-matching frictions in labour markets. Workers migrate temporarily in response to differences in labour market conditions and wages, allowing productivity shocks to affect local labour supply. The results show that productivity shocks in the host economy attract temporary migrants and increase labour supply. This migration response amplifies output fluctuations while leaving inflation dynamics largely unaffected. Migration also smooths wage responses but increases the volatility of employment. At the same time, temporary migration dampens the macroeconomic effects of productivity shocks in the sending economy by redistributing labour across regions. These findings highlight the role of labour mobility as an adjustment mechanism within an integrated economic area and suggest that cross-border migration can significantly shape business cycle dynamics in Europe. JEL Classification: E20, E32, F16, F22, F41