Migration and Macroeconomics
Investigating the business cycle in 55 bilateral migration corridors in the euro area over the period 1980-2010, we find evidence for business cycle related fluctuations in net migration flows and the crucial role of unemployment in shaping migration patterns. While on average wage and unemployment differentials are negatively correlated with net migration, across migration corridors we document a considerable heterogeneity in both dimensions that is more pronounced for wages.
In line with these findings, we built a two-country dynamic stochastic general equilibrium (DSGE) model of internal business cycle migration in the euro area and allow for unemployment that occurs as a consequence of labor market frictions and rigidities in both countries. Our model is able to replicate the empirical observations and explains the heterogeneity of migration corridors by differences in the type of shock that hits an economy and the relative price/wage rigidity. We contribute to the literature on the causes and consequences of temporary migration and bridge it to DSGE models with unemployment.
Policy paper: "EU Immigration Has Increased Germany’s Economic Growth", DIW Weekly Report 44 / 2018, S. 441-449,
Media coverage: Tagesschau, Handelsblatt, Wirtschaftswoche, Spiegel, Forbes, Bloomberg.
We propose a two-country DSGE model with price rigidities and migration that is able to replicate the empirical facts on business cycle migration in the euro area. In this model unemployment arises from search and matching frictions. We start by modeling migration as a proportional outflow from unemployed workers and in a second step endogenize migration via the unemployed workers’ choice on which labor market to search for a job. The framework allows to account for wage and unemployment gaps between natives and immigrants over the cycle as well as for factors such as language barriers that hinder the labor market integration of foreigners.
We find that the impact of migration on country-specific average wages and unemployment depends crucially on the characteristics of immigrants and natives as well as the institutional characteristics of the total corridor, i.e. search efficiency. The model will be used to analyze the effects of different immigration and labor market policies on migration patterns and welfare.
This paper evaluates the temporary VAT reduction introduced by the German government over the third and fourth quarter of 2020 as most controversial part of the COVID-19 stimulus package. Critics argue that VAT reductions are ineffective because of limited pass-through of temporary measures to consumer prices and in presence of lockdown measures. Advocates emphasize positive effects on durables and stress that a VAT reduction can at least partly substitute for a limited monetary policy response under the ZLB.
We extend a DSGE model which is capable to address a durable investment channel and a limited VAR pass-through by distinguishing between sectors directly and indirectly affected by the lockdown. This allows us to trace economic spillovers of lockdown measures to the rest of the economy and the differentiated impact of VAT measures on both sectors.
For the specific lockdown situation in Germany, we analyze the impact of the VAT reduction in conjunction with the lockdowns in 2020 Q2 to Q4. We use non-linear solution techniques to solve the model in the presence of a ZLB, forced savings and a lockdown constraint.
We find a VAT short-term multiplier of one, which reduces over the medium term. Thus, the temporary VAT reduction is an effective instrument in the short-term but not efficient with regard to medium-term budget sustainability.
Policy paper: "Mehrwertsteuersenkung hat deutsche Wirtschaft im Corona-Jahr 2020 gestützt", DIW aktuell 62.
Media coverage: Handelsblatt, Manager Magazin.
A European unemployment insurance scheme has gained increased attention as a new and ambitious common fiscal instrument which could be used for temporary cross-country transfers. Part of the national stabilizers composing unemployment insurance schemes would be transferred to the central level. Unemployed are then insured by both layers. When a country is hit by an asymmetric shock, it would receive positive net transfers from the central
fund in the form of reduced taxes and increased benefits, providing risk-sharing for the whole union.
We build a two-country DSGE model with supply, demand and labor market shocks in order to capture the recent national insurance system and the unemployment insurance union (UIU) design. The model is calibrated to the euro area core and periphery data and matches the empirically observed cyclicality of the net replacement rate, the wage and unemployment dynamics. This baseline scenario is then compared to a optimal unemployment insurance union with passive and active benefit policies.
For all underlying shocks, we find that the UIU reduces the fluctuation of consumption and unemployment while it increases the fluctuation of the trade balance. In case of a positive domestic government spending shock the UIU reduces the negative crowding out effect on private consumption and investment. The model will be used to analyze the effects of national and supranational benefit policies on labour market patterns and welfare.
Policy paper: "A Stabilization Fund Can Make the Euro Area More Crisis-Proof", DIW Weekly Report 22/23 / 2018, S. 193-200.
Media coverage: Handelsblatt, Tagesspiegel, Spiegel.
While the first two pillars of the European Banking Union have been implemented, a European deposit insurance scheme (EDIS) is still not in place. To facilitate its introduction, recent proposals argue in favor of a reinsurance scheme. In this paper, we use a regime-switching open-economy DSGE model with bank default and bank-government linkages to assess the relative efficiency of such a scheme.
We find that reinsurance by both a national fiscal backstop and EDIS is efficient in stabilizing the macro economy, even though welfare gains are slightly larger with EDIS and debt-to-GDP ratios rise under the fiscal reinsurance. We demonstrate that risk-weighted contributions to EDIS are welfare-beneficial for depositors and discuss trade-offs policy makers face during the implementation of EDIS. In a counterfactual exercise, we find that EDIS would have stabilized economic activity in Germany and the rest of the euro area just as well as a fiscal backing of insured deposits during the financial crisis. However, the debt-to-GDP ratio would have been lower with EDIS.
Policy paper: "European Bank Deposit Insurance Could Cushion Impact of Corona-Induced Corporate Insolvencies", DIW Weekly Report 32/33 / 2020, S. 325-333.
Media coverage: Handelsblatt, Springer Professional
Inequality & Heterogeneous Agents
A two-sector incomplete markets model with heterogeneous agents can be used to study the distributional effects of the COVID-19 lockdown. While negative aggregate welfare effects of the lockdown are unavoidable, the size of aggregate welfare effects as well as the distribution of the welfare effects across agents turn out to depend on the specific economic environment of the affected economy as well as the response of the government to the shock. We use the model to simulate the lockdown effects based on a calibration to German data.
First, we find that without state aid and limited access to international financial markets especially poor household suffer large welfare losses, while wealthy household could even benefit from the lockdown. Second, a state aid program reduces large parts of the welfare losses of workers across all income groups in the affected sectors by forcing loss sharing with agents working in the non-affected sector. However, wealthy households no matter in which sector still benefit more than the average household. Third, access to international financial markets is key to shift relative welfare gains from superrich to poorer households in both sectors. Once the country is able to borrow internationally, the benefit for superrich diminishes. Our results implicate that countries with rather limited access to financial markets and less stable government budget positions will suffer higher welfare losses and increases in inequality.
We augment the ‘truncated history approach’ with a loss (penalty) function in order to approximate the solution of a heterogeneous agent model with aggregate shocks. We apply the solution technique to a standard real business cycle model hit by TFP and fiscal shocks and assess the goodness of the approximation in comparison to the non-linear solution of the model without aggregate uncertainty. We find that incorporating the loss function does a very good job in tracing the ’true’ responses of aggregate variables and inequality measures for both, TFP and fiscal shocks. Importantly, Ricardian equivalence breaks down in the model with a loss function. This feature allows to compare the welfare effects of different fiscal policies according to their financing conditions, i.e. debt-intensive vs. tax-intensive policy.
Business cycle fluctuations affect wages and labor supply of women and men differently. Using quarterly data for Germany between 1Q1991 to 4Q2020 we find that with the exception of the gender unemployment gap all other gender labor market gaps contract during a recession and widen during a boom on average. However, we also find the opposite relationship for some periods. These observations suggest that the type of the underlying shock influences gender gaps over the cycle. While the financial crisis 2008/09 was a “mancession”, our results indicate that the COVID-19 crisis is a ”shecession” driving more women than men into unemployment.
In order to analyze this changing relationship of business cycle and gender gaps in Germany we implement gender-specific structural differences in a DSGE model with search and matching frictions. We consider that the structural labor market characteristics of men and women, i.e. labour supply elasticities, housework elasticity, affect the average cyclical dynamics of gender gaps. Furthermore, they react quite different depending on the underlying shock. Productivity and labour-supply driven shocks, a temporary decrease of homework productivity explain why gender wage gaps increase in a recession. In demand driven recessions the gender wage gap rather contracts.