The role of demographics and migration for the future of economic growth in China

July 28, 2020

By Juan Carlos Conesa and Yan Wang

China’s real GDP has been growing by almost 10 percent a year for the last three decades. For how long should we expect this spectacularly high growth to continue? We evaluate in a quantitative two sector model with segmented labor markets and financial frictions the prospects for China’s future growth under different policy scenarios. In our model the high growth rate observed in China since the early 1990s is fueled by the large increase in urban labor supply, because of rural-urban migration, and the emergence of private enterprises that absorb those migrant workers. Our simulations suggest that the rapid aging of its population will significantly decelerate urban labor force and economic growth starting around 2040. In a counterfactual exercise we show that substantial relaxation of labor market segmentation and financial constraints faced by private enterprises cannot compensate for that deceleration.

Mainland China has a series of demographic time bombs waiting to explode: aging, sex imbalance, shrinking of population, many internal migrants with little rights. This paper addresses some of those. China is ahead of challenging times.


Housing prices and credit constraints in competitive search

July 24, 2020

By Juan Pablo Rincón-Zapatero, Maria Belen Jerez Garcia-Vaquero and Antonia Diaz Rodriguez

We embed a competitive search model of the real estate market into a heterogeneous agent setting where households face credit constraints and idiosyncratic turnover shocks. Households can accumulate a risk-free asset to build a down payment and to smooth non-housing consumption.There is an inelastic supply of identical homes. The model is “block recursive”. In equilibrium wealthier home buyers sort into submarkets with higher prices and shorter buying times. We identify a novel amplification mechanism, arising from sorting, by which demand shocks can substantially affect housing prices. In particular, lowering down payment requirements induces entry of new buyers in the market and higher asset accumulation by current searchers, as these agents target more expensive (less congested) submarkets. This affects the distribution of prices and trading probabilities, and thereby the wealth distribution. Our quantitative results suggest that the effects on the long-run level and dispersion of housing prices can be significant.

Nice paper that highlights how general equilibrium effects are important and can annihilate the intended effect of a policy. For example, making it easier to get a mortgage may just increase house prices with no change in house ownership.

Immigration, Legal Status and Fiscal Impact

July 22, 2020

By Andri Chassamboulli and Xiangbo Liu

How do legal and illegal immigrants affect the fiscal balance and welfare of natives in the host country? To answer this question we develop a general equilibrium model with search frictions in the labor market that accounts for both the direct net contribution of immigrants to the fiscal balance and their indirect fiscal effects through their labor market impact. We calibrate the model to the US economy and find that legal immigrants increase native welfare, mainly due to their positive direct net contribution to the fiscal balance. On the other hand, illegal immigrants’ positive welfare impact stems mainly from their positive effect on job creation, which helps improve the fiscal balance, but also increases income to natives and in turn consumption. A legalization program leads to a fiscal gain and increases native welfare and it is more beneficial to the host country’s citizens than a purely restrictive immigration policy that reduces the illegal immigrant population.

There you have it: both legal and illegal immigration are beneficial to the economy in general and the natives in particular.