Emigration and Fiscal Austerity in a Depression

August 18, 2021

By Guilherme Bandeira, Jordi Caballe and Eugenia Vella


This paper studies the role of emigration in a deep recession when the government implements fiscal consolidation. We build a small open economy New Keynesian model with search and matching frictions, emigration of the labour force, and fiscal details. Our simulations for the austerity mix during the Greek Depression show that fiscal austerity accounts for one third of the output drop and more than 10% of migration outflows, whereas the rest is attributed to the macroeconomic environment. A counterfactual without migration underestimates the fall in output by one fifth. The model also sheds light on the two-way relation between emigration and austerity. Labour income tax hikes induce prolonged migration outflows, while spending cuts exert only a small effect on emigration which can be positive or negative depending on opposite demand and wealth effects. On the flip side, emigration increases the required tax hike and time to meet a given debt target due to endogenous revenue leakage. For tax hikes, emigration acts as an absorber of the austerity shock by diluting the output costs per resident through shrinking population. Yet, in terms of unemployment, temporary gains are reversed over time due to the distortionary effects of taxes on employment.

There is some literature on the effect of tax hikes on emigration. There is some, but it is not as bad as some make it sound. This paper goes further with its analysis of the recent Greek austerity: it also considers the budget cuts and debt targets. Those appear to have a negligible impact on emigration, but emigration has a larger impact on debt service, as the same debt needs to be carried by fewer people.


Does It Matter How Central Banks Accumulate Reserves? Evidence from Sovereign Spreads

August 14, 2021

By César Sosa-Padilla and Federico Sturzenegger


There has been substantial research on the benefits of accumulating foreign reserves, but less on the relative merits of how these reserves are accumulated. In this paper we explore whether the form of accumulation affects country risk. We first present a model of endogenous sovereign debt defaults, where we show that reserve accumulation through the issuance of debt contingent on local output reduces spreads in a way that reserve accumulation with foreign borrowing does not. We confirm this model prediction when taking the theory to the data. These results suggest that attention should be placed on the way reserves are accumulated, a distinction that has important practical implications. In particular, our results call into question the benefits of programs of reserves strengthening through external debt such as those typically implemented by multilateral organizations.

Indeed, in this day and age of sophisticated financial instruments, one should be able to do better than issuing debt denominated in US dollars. If shareholders are willing to take reduced dividends in downturns, there should be a market for sovereign debt tied to contingencies. That should work as long as statistical agencies can maintain their independence, which can be a hurdle, though.

Distributional Effects of Emission Pricing in a Carbon-Intensive Economy: The Case of Poland

August 8, 2021

By Marek Antosiewicz; J. Rodrigo Fuentes; Piotr Lewandowski; Jan Witajewski-Baltvilks


In this paper, we assess the distributional impact of introducing a carbon tax in Poland. We apply a two-step simulation procedure. First, we evaluate the economy-wide effects with a dynamic general equilibrium model. Second, we use a microsimulation model based on household budget survey data to assess the effects on various income groups and on inequality. We introduce a new adjustment channel related to employment changes, which is qualitatively different from price and behavioural effects, and is quantitatively important. We find that the overall distributional effect of a carbon tax is largely driven by how the revenue is spent: distributing the revenues from a carbon tax as lump-sum transfers to households reduces income inequality, while spending the revenues on a reduction of labour taxation increases inequality. These results could be relevant for other coal-producing countries, such as South Africa, Germany, or Australia.

Another paper on the carbon tax, and again it leaves unsatisfied. I am a big fan of carbon taxes, and it seems trivial to think that redistribution will depend on how the revenues are spent. What is really interesting is that Poland is currently very much dependent on coal for heating at the household level. The costs to convert to other technologies are substantial, hence the tax needs to be very high to have a bite. The household response will be much more complex than a microsimulation can yield because you are not talking about a small variation around existing allocations. This is going to be massive, and the resistance will be huge.