Working Paper : 2035

Authors Bandeira, G., Caballe, J. and Vella, E.
Title Emigration and Fiscal Austerity in a Depression
Abstract This paper studies the role of emigration in a deep recession when the government implements fiscal consolidation. We build a small open economy New Keynesian model with search and matching frictions, emigration of the labour force, and fiscal details. Our simulations for the austerity mix during the Greek Depression show that fiscal austerity accounts for one third of the output drop and more than 10% of migration outflows, whereas the rest is attributed to the macroeconomic environment. A counterfactual without migration underestimates the fall in output by one fifth. The model also sheds light on the two-way relation between emigration and austerity. Labour income tax hikes induce prolonged migration outflows, while spending cuts exert only a small effect on emigration which can be positive or negative depending on opposite demand and wealth effects. On the flip side, emigration increases the required tax hike and time to meet a given debt target due to endogenous revenue leakage. For tax hikes, emigration acts as an absorber of the austerity shock by diluting the output costs per resident through shrinking population. Yet, in terms of unemployment, temporary gains are reversed over time due to the distortionary effects of taxes on employment.
Creation Date 2020-06-23
Keywords fiscal consolidation, emigration of employed, on the job search, matching frictions, Greek crisis.
Classification JEL E32, F41
File migrationdraft.22june2020_v2.pdf (1384134 bytes)
File-Function First version

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