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Do differences in international labor mobility lead to differences in the fiscal multiplier? A theoretical approach

Pfammatter, Andrea Corina (2015): Do differences in international labor mobility lead to differences in the fiscal multiplier? A theoretical approach.

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Abstract

A real business cycle economy with endogenous labor supply and heterogeneous households is modeled. I allow for different degrees of labor migration to assess potential differences in the effects of changes in government consumption on aggregate economic activity. I argue that a relatively elastic labor migration with respect to economic activity may have a positive effect on the effectiveness of fiscal policy because labor migration may influence labor market adjustments after a positive government consumption shock. The findings suggest that there is a positive relationship between labor migration elasticity and the size of the fiscal multiplier. However, whether the relationship is economically meaningful is uncertain and requires further research.

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