| Abstract |
How does labor mobility shape fiscal transmission? Using a small open economy DSGE model with endogenous
skill-specific migration, search-and-matching frictions, and capital-skill complementarity (CSC),
we show that the composition of emigration - not just its volume - is the key determinant of the fiscal
multiplier. Following a fiscal contraction, CSC generates predominantly high-skilled emigration, which
alleviates labor market congestion but depresses aggregate demand, amplifying the multiplier. At a fiveyear
horizon, the multiplier more than doubles relative to the economy without emigration. Absent CSC,
emigration is instead low-skilled, and migration has little bearing on fiscal transmission. We calibrate the
model to the Greek Depression, a setting characterized by severe fiscal consolidation, large-scale high-skilled
emigration, and rising skills mismatch. Our findings reveal a novel interaction between brain drain and fiscal
policy: economies experiencing skill-biased emigration face systematically larger fiscal multipliers, with
direct implications for the design of consolidation programs in open economies. |
