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Fiscal Austerity and Migration: A Missing Link

Author

Listed:
  • Guilherme Bandeira

    (Bank of Spain)

  • Jordi Caballe

    (Universitat Autonoma de Barcelona and Barcelona GSE)

  • Eugenia Vella

    (University of Sheffield and MOVE, Universitat Autonoma de Barcelona)

Abstract

In this paper we propose a new channel through which fiscal austerity affects the macroeconomy. To this end, we introduce endogenous migration both for the unem- ployed and the employed members of the household in a small open economy New Keynesian model with labour market frictions. Our model-based simulations for the austerity mix implemented in Greece over the period 2010-2015 show that the model is able to match the total size of half a million emigrants and output drop of 25%, while the model without migration generates an output drop of 20%. Having established that the model delivers empirically plausible results, we then use it to investigate (i) the two-way relation between migration and austerity, and (ii) the role of migration as shock absorber. We find that tax hikes induce prolonged migration outflows, while the effect of spending cuts is hump-shaped. In turn, emigration implies an increase in both the tax hike and time required to achieve a given size of debt reduction. As a result of the labour-reducing effect of these higher tax hikes, the unemployment gains from migration are only temporary in the presence of austerity and are substantially reversed over time.

Suggested Citation

  • Guilherme Bandeira & Jordi Caballe & Eugenia Vella, 2019. "Fiscal Austerity and Migration: A Missing Link," Working Papers 2019009, The University of Sheffield, Department of Economics.
  • Handle: RePEc:shf:wpaper:2019009
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    File URL: http://www.sheffield.ac.uk/economics/research/serps/articles/2019_009
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    1. Ikhenaode, Bright Isaac & Parello, Carmelo Pierpaolo, 2020. "Immigration and remittances in a two-country model of growth with labor market frictions," Economic Modelling, Elsevier, vol. 93(C), pages 675-692.

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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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