EU temporary migration amplifies output fluctuations

The paper develops a two-country dynamic stochastic general equilibrium (DSGE) model, calibrated for the “old” EU Member States (EU15) and the “new” Member States from Central and Eastern Europe (NMS12), to analyze endogenous temporary migration.

Workers move in response to differences in labor market conditions and wages, allowing productivity shocks to affect local labor supply.

Results show that host economy productivity shocks attract temporary migrants, increasing labor supply and amplifying output fluctuations.

This response smooths wage adjustments but increases employment volatility.

Conversely, temporary migration dampens the macroeconomic effects of productivity shocks in sending economies by redistributing labor.

These findings emphasize labor mobility's role as an adjustment mechanism within an integrated economic area, significantly shaping European business cycle dynamics.

The model explicitly incorporates search-and-matching frictions and remittance flows, offering a comprehensive framework for understanding migration's interaction with macroeconomic conditions and capital accumulation.

Labour mobility has become a crucial feature of the European economy, especially after EU enlargement and the removal of cross-border restrictions.

Despite its importance, explicit incorporation into macroeconomic models for business cycle analysis and policy transmission remains rare.

This paper addresses this gap by creating a framework where temporary migration arises endogenously as part of the economic adjustment process.

Migrants maintain economic links with their home country through remittances and investment, capturing the temporary nature of many observed flows.

The model is calibrated to reflect key structural features like productivity levels and institutional arrangements between the EU15 and NMS12, allowing for a coherent analysis of how migration affects business cycle dynamics and labor markets in both sending and receiving economies.