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Should I stay or should I go? Austerity, unemployment and migration

Guilherme Bandeira (), Jordi Caballé () and Eugenia Vella ()
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Guilherme Bandeira: Banco de España
Jordi Caballé: Universitat Autònoma de Barcelona and Barcelona GSE
Eugenia Vella: Move, Universitat Autònoma de Barcelona, and University of Sheeld

No 1839, Working Papers from Banco de España, Working Papers Homepage

Abstract: High unemployment and fiscal austerity during the Great Recession have led to significant migration outflows in those European countries that suffered a deep deterioration of their economy, Greece being the most obvious case. This paper introduces endogenous migration in a small open economy DSGE model to analyze the business cycle effects from the interaction of fiscal consolidation instruments with migration. A tax-based consolidation induces the strongest increase in emigration, leading to the highest costs in terms of aggregate GDP and unemployment in the medium run. As a result, the unemployment gains from migration are only temporary. However, in terms of per capita GDP, cuts in the components of public spending that are either productive or utility-enhancing can lead to a deeper contraction than tax hikes or wasteful spending cuts. The introduction of potential migration by the employed implies even higher unemployment costs, a deeper demand contraction, and an increase in both the tax hike and the time required to achieve the same size of fiscal consolidation.

Keywords: fiscal consolidation; migration; matching frictions; on-the-job search (search for similar items in EconPapers)
JEL-codes: E32 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mig
Date: 2018-11
References: View references in EconPapers View complete reference list from CitEc
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1839

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