Monetary Policy Response to a Migration Shock: An Analysis for a Small Open Economy

Abstract

We develop a small open economy model with nominal rigidities and fragmented labor markets to study the response of the monetary policy to a migration shock. Migrants are characterized by their productivity levels, their restrictions to accumulate capital, as well as by the flexibility of their labor income. Our results show that the monetary policy response depends on the characteristics of migrants and the local labor market. An inflow of low(high)-productivity workers reduces(increases) marginal costs, lowers(raises) inflation expectations and pushes the Central Bank to reduce(increase) the interest rate. The model is calibrated to the Colombian economy and used to analyze a migratory inflow of financially constraint workers from Venezuela into a sector with flexible and low wages.

Constraints or Opportunities?: Labor Informality and Public Investment in Shaping Debt Limits

“…6 This type of labor usually operates in not legally recognized environments such as the subsistence economy or family-scale businesses, and it is noncompliant with fiscal obligations. Although this feature is crucial in the economic policymaking decisions in these countries and there have been some efforts to formally introduce the different edges of this phenomenon in economic theory (see for example, (Ulyssea, 2010(Ulyssea, , 2018Granda et al, 2019;Granda & Hamann, 2020;Hamann et al, 2021;Restrepo-Echavarria, 2014)), it has not been a broadly studied topic in the context of fiscal sustainability. There are two common definitions of informality based on national surveys on households and firms.…”

“…The second approach takes into account an even more restrictive measure of informality and is related to the existence of a minimum wage. This second approach, explored in Hamann et al (2021); Arango et al (2022), is based on workers' minimum wage access. This approach depends on different institutional and regulatory arrangements regarding the compulsory condition of the payment of a minimum wage as part of the obligations a formal firm must fulfill.…”

“…From the GEIH survey, we find that the average income of the formal workers is roughly 1.76 times greater than the informal workers. In addition, Hamann et al (2021) report a wage premium of formal agents of 3.71 and the share of labor income of formal agents to total labor income close to 78%. In Figure 2, we show the income distribution for formal, informal and aggregate workers from GEIH 2019 using informality criterion 4.…”

“…Recall that in our model that the latter is equivalent to the long-run fiscal deficit, because only the government is able to issue foreign debt, and currently the government is committed to keep the deficit at 1% of GDP. The depreciation rate and investment adjustment cost parameters are set to be κ = 1.7 and δ = 0.1, following Hamann et al (2021). In our baseline calibration, public capital efficiencies in both sectors are normalized to one, Φ N = Φ T = Φ = 1.On the households side, their discount factor β is equal to 0.9878, consistent with Hamann et al ( 2021) and other structural models for the Colombian economy like Arango et al (2022).…”

“…We choose a standard value in the literature for the relative risk aversion coefficient and set it equal for both types of households σ I = σ F = 2. The inverse of Frisch elasticities are also taken from Hamann et al (2021), which are υ I = 2.4 and υ F = 3.7. Considering the aggregation of goods bundles, we equalize all the elasticity of substitution between tradables and nontradables for consumption and investment, both private and public, to take the same value, ℵ = ℵ G = ℵ I = ℵ IG = 0.44, which Bi et al (2016b) use for Argentina.…”