On the Response of Inflation and Monetary Policy to an Immigration Shock
Benjamin Garcia () and
Juan Guerra-Salas ()
Working Papers Central Bank of Chile from Central Bank of Chile
An immigration shock has an ambiguous effect on inflation. On one hand, aggregate consumption increases with a suddenly larger population; this “demand channel” creates inflationary pressures. On the other hand, the labor market becomes more slack as immigrants search for jobs, containing wage growth; this “labor supply channel” creates disinflationary pressures. The response of an inflationtargeting central bank to an immigration shock is, therefore, not obvious. We study these competingchannels in a New Keynesian model of a small open economy with search frictions in the labor market. Our simulations are designed to characterize the possible response of inflation and monetary policy in Chile, a small open emerging country that has experienced a substantial immigration flow in recent years.
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mig and nep-mon
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