Emigration and fiscal austerity in a depression

Guilherme Bandeira, Jordi Caballé*, Eugenia Vella

*Corresponding author for this work

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Abstract

What is the role of emigration in a deep recession when the government implements fiscal consolidation? To answer this question, we build a small open economy New Keynesian model with matching frictions and emigration. In simulations for the Greek Depression, fiscal austerity accounts for almost 1/3 of the GDP decline and 12% of emigration. A no-migration scenario under-predicts the bust in output by 1/6 and the rise in the debt-to-GDP ratio by 8 percentage points. The link between emigration and austerity is bi-directional. Emigration increases the labour tax hike and time required to reduce the debt ratio due to endogenous revenue leakage. In turn, tax hikes intensify emigration, while unproductive government spending cuts have a mild, ambiguous impact as they exhibit opposite demand and wealth effects. However, productive spending cuts display a fiscal multiplier above one, which incentivizes emigration. Emigration then amplifies the productive spending multiplier through internal demand. Similarly, the cumulative labour tax multiplier after five years rises from 0.86 without migration to 1.27 when the unemployed emigrate and 1.47 when both the unemployed and the employed emigrate.

Original languageEnglish
Article number104539
Pages (from-to)104539
JournalJournal of Economic Dynamics and Control
Volume144
DOIs
Publication statusPublished - Nov 2022

Keywords

  • Emigration
  • Fiscal austerity
  • Fiscal multipliers
  • Greek crisis
  • Matching frictions
  • On-the-job search

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