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How do economies with open labour markets work? The role of temporary migration in the European Union

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  • Budnik, Katarzyna

Abstract

This paper studies how temporary migration affects macroeconomic fluctuations and the conduct of stabilisation policies using a two-country DSGE model with search-and-matching frictions and endogenous cross-border labour mobility. The analysis shows that migration responds endogenously to both labour market conditions and exchange rate movements, making it an important channel of cross-country adjustment. Labour mobility alters the transmission of shocks in three main ways. First, it redistributes adjustment to productivity shocks across regions, smoothing output fluctuations in receiving economies while producing more nuanced effects in sending economies. Second, it favorably affects policy trade-offs: migration reduces the output costs of monetary tightening, and it mitigates the crowdingout effects of fiscal expansions. Third, it strengthens cross-country spillovers by transmitting labour market shocks across regions and reshaping their domestic propagation. Overall, temporary migration emerges as a powerful but non-neutral adjustment mechanism that affects both the effectiveness of stabilization policies and the distribution of macroeconomic outcomes across integrated economies. JEL Classification: E20, E32, F16, F22, F41

Suggested Citation

  • Budnik, Katarzyna, 2026. "How do economies with open labour markets work? The role of temporary migration in the European Union," Working Paper Series 3251, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20263251
    Note: 1355359
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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