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Fiscal Austerity and Migration: A Missing Link

Guilherme Bandeira (), Jordi Caballe () and Eugenia Vella
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Guilherme Bandeira: Bank of Spain
Jordi Caballe: Universitat Autonoma de Barcelona and Barcelona GSE

No 2019009, Working Papers from The University of Sheffield, Department of Economics

Abstract: In this paper we propose a new channel through which fiscal austerity affects the macroeconomy. To this end, we introduce endogenous migration both for the unem- ployed and the employed members of the household in a small open economy New Keynesian model with labour market frictions. Our model-based simulations for the austerity mix implemented in Greece over the period 2010-2015 show that the model is able to match the total size of half a million emigrants and output drop of 25%, while the model without migration generates an output drop of 20%. Having established that the model delivers empirically plausible results, we then use it to investigate (i) the two-way relation between migration and austerity, and (ii) the role of migration as shock absorber. We find that tax hikes induce prolonged migration outflows, while the effect of spending cuts is hump-shaped. In turn, emigration implies an increase in both the tax hike and time required to achieve a given size of debt reduction. As a result of the labour-reducing effect of these higher tax hikes, the unemployment gains from migration are only temporary in the presence of austerity and are substantially reversed over time.

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)
Pages: 51 pages
Date: 2019-04
New Economics Papers: this item is included in nep-bec, nep-dge, nep-eec, nep-mac, nep-ore and nep-ure
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http://www.sheffield.ac.uk/economics/research/serps/articles/2019_009 First version, April 2019 (application/pdf)

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