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Sovereign Default Risk and Migration

George Alessandria (), Minjie Deng and Yan Bai
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Minjie Deng: University of Rochester
Yan Bai: University of Rochester

No 1085, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We study the role of migration in a sovereign debt crisis. Empirically, we document a large worker outflow accompanies a rise in sovereign debt spreads. We develop a model of sovereign default with an endogenous migration choice to understand how migration interacts with the default risk and propagates a debt crisis. In the model, the outflow of workers increases the government’s debt burden by increasing debt-per-capita, further increasing default risk. As a result, the government decreases investment, which affects the consumption of the workers. Lower consumption, in turn, increases the probability of emigration. Compared with a model without endogenous migration, our model generates a higher default risk, lower investment, and deeper and more prolonged recession. The impact of the migration channel is even more substantial when the average migrant has higher levels of human capital relative to locals.

New Economics Papers: this item is included in nep-opm
Date: 2019
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