Migration and Macroeconomics

Migration, Unemployment and the Business Cycle - A Euro Area Perspective - (with Janine Hart)
In the recent European debt crisis, internal migration flows in the euro area reacted strongly to diverging labor market conditions. This experience points towards the prominent role of short-term business cycle migration in the euro area and the consequent need to understand the motives behind it.
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.
presented at the EEA-ESEM 2018@Cologne, Verein für Socialpolitik 2016@Augsburg, 11th Dynare Conference@Brussels, CEF 2015, Taipeh, HU Brown Bag Seminar@Berlin, PRSE Seminar@Potsdam.
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.

A Search and Matching Approach to Business-Cycle Migration in the Euro Area (with Janine Hart)
Recently migration patterns in the euro area changed markedly in response to increasing unemployment disparities. This reinforced the interest in labor mobility as stabilization tool against the background of heterogeneous labor market conditions.
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.
nominated for the Young economists’ competition at the ECB Forum 2019 @Sintra, presented at the Verein für Socialpolitik 2019@Leipzig, EEA-ESEM 2019@Manchester, CEF 2018@Milano, ESPE 2018@Antwerpen,  EALE 2018@Lyon, SMYE 2017@Halle, EEA-ESEM 2016@Geneva, Econometric Society NASM 2016@Philadelphia, 12th Dynare Conference@Rome, 10th CFE Conference@Sevilla, BERA Macroeconomic Workshop@Berlin.
Media coverage: Tagesschau, Handelsblatt, Wirtschaftswoche, Spiegel, Forbes, Bloomberg.

Fiscal Policy

What Is the Difference between Fossil Fuel Embargo and Price Shocks? (with Werner Roeger)

In this paper, we model a fossil fuel embargo as a temporary quantity constraint on fossil fuel imports and we compare the impact with the effect of a fossil fuel price shock. We show that while both shocks have similar responses of output and inflation, they differ with respect to other macroeconomic components, such as consumption, exports and the trade balance. In particular, an embargo has more adverse effects on the functional income distribution. Our findings are relevant for policymakers when determining the most effective stabilization policy. We compare different monetary and fiscal stabilization policies, such as different interest rate policies, energy tax reduction, transfer to liquidity-constrained households, and a value-added tax cut. We find that fiscal policy can complement monetary policy, by targeting distributional objectives. There is no conflict with monetary policy in the case of energy taxes and VAT, while in the case of transfers output and consumption stabilization of low-income households is accompanied by slightly higher inflation. We find that fiscal policies are less effective in stabilizing GDP in the case of an embargo shock. In particular, a reduction of the energy tax is completely ineffective when there is an embargo. In contrast, in the event of a fossil fuel price shock, an energy tax reduction is effective because it counteracts the price increase and allows companies to respond according to their energy demands.

published at Energy Economics, presented at the EES-ESEM 2023@Barcelona

An Estimation and Decomposition of the Government Investment Multiplier (with Claus Michelsen and Malte Rieth)

We construct a new narrative instrument for government investment shocks from official records in Germany. Using structural vector autoregressions, we document a significant crowding-in of private demand and an output multiplier of 2 on impact, which increases to 3 after five years. Then, we use a New Keynesian dynamic stochastic general equilibrium model matched to the empirical responses to decompose the multiplier into two channels. In the short run, public investment grants reduce private investment costs. In the long run, public investment increases the production capacity of the economy. The estimated output elasticity of public capital is 0.06.

presented at the Verein für Socialpolitik 2022@Basel (virtual), IAAE 2022@London, EEA-ESEM2022@Milano.
Policy paper: "Public Investment a Key Prerequisite for Private Sector Activity", DIW Weekly Report 31/2018, Öffentliche Investitionen als Voraussetzung für Produktivitätswachstum, inclusive productivity, Bertelsmann Stiftung.
Media coverage: Spiegel, Handelsblatt

Rising Allowances, Rising Rates -- Can Growth Arise through Business Income Tax Reform despite Government Debt Limit? (with Werner Roeger)

The system of business income taxation consists of two instruments, namely a statutory tax rate and a depreciation allowance on investment. We will show in this paper that by acting on both instruments simultaneously it is possible to achieve both a growth and a fiscal net revenue target even in cases when a trade-off prevails when each instrument is used individually. As will be shown in the paper, depreciation allowances have a more favorable trade-off between growth and net revenue in the long run compared to statutory business income tax rates. Thus, by rising depreciation allowances and the statutory tax rate at the same time, it is possible to both increase growth and fiscal space. In a model simulation calibrated to the German economy and tax system, an increase of the tax depreciation rate for all investments from 10\% to 25\% leads to a more than 2 percent GDP increase and more than 6 percent higher private investments in total. Whereas GDP and investment rise steadily over time, the government budget becomes negative in the short run. In the long run, the sign of the fiscal budget effect is determined by the indexation of government consumption to GDP. However, according to our findings, slight adjustments in the statutory business income tax rate could balance out these deficits and generate additional fiscal space.

accepted at Journal of Macroeconomics, Policy paper: Ampel-Pläne zu „Superabschreibungen“ können Investitionen und Wachstum erhöhen, finanzpolitische Spielräume würden aber enger, DIW aktuell 74.
Media coverage: Spiegel

Temporary VAT Reduction during the Lockdown - Evidence from Germany (with Werner Roeger)

This paper evaluates the temporary VAT reduction introduced by the German government over the 3Q2020:4Q2020 as a controversial part of the COVID-19 stimulus package. Critics argue that VAT reductions are ineffective because of limited pass-through to consumer prices and during lockdown. Advocates emphasize positive effects on durable goods and stress that a VAT reduction can partly substitute for a limited monetary policy response under the zero lower bound (ZLB). Thus, the VAT policy experiment of a sizable two-quarter VAT reduction allows studying the effects and transmissions channels of VAT measures.

We extend a dynamic stochastic equilibrium (DSGE) model to address a durable goods channel and a limited VAT pass-through and distinguish between sectors directly and indirectly affected by the lockdown. We trace lockdown and fiscal shocks and analyze the impact of the VAT reduction in conjunction with the lockdowns in 2020-2021 in Germany.

We use nonlinear solution techniques to solve the model in the presence of a ZLB, forced savings and a partial lockdown constraint. Although the lockdown restriction reduces the effectiveness of a temporary VAT reduction, we find a short-term multiplier of 1.8. However, the cumulative multiplier reduces to below 1 over the medium term due to a shift in durable goods consumption toward 2020. Thus, the temporary VAT reduction is an effective instrument for short-term stabilization during the partial lockdown, but fiscal costs appear in the medium term.

presented at the EEA-ESEM2022@Milano, Verein für Socialpolitik 2021@Regensburg (virtual), CEF 2021@Tokyo (virtual).
Policy paper: "Mehrwertsteuersenkung hat deutsche Wirtschaft im Corona-Jahr 2020 gestützt", DIW aktuell 62.
Media coverage: Handelsblatt, Manager Magazin.

Unemployment Insurance Union (with Guillaume Claveres)

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.

presented at the EALE 2018@Lyon, Verein für Socialpolitik 2018@Freiburg, CEF 2018@Milano, SED 2017@Edingburgh, EEA-ESEM 2017@Lisbon, EUROFRAME 2017@Berlin.
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.

The Macroeconomic Effects of a European Deposit (Re-)Insurance Scheme (with Stefan Gebauer and Tobias König)

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.

presented at 37th Symposium on Money, Banking and Finance@Banque de France, Paris, RES Annual Conference 2020 @Belfast (virtual), Verein für Socialpolitik 2020 @Cologne, 13th RGS Doctoral Conference in Economics 2020 @Dortmund, SMYE 2021 @Bologna (virtual), CEF 2020@Warsaw (canceled).
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 and Heterogeneous Agents

Distributional Effects of the COVID-19 Lockdown (with Maik Heinemann)

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.

presented at EEA-ESEM 2021@Rotterdam (virtual).

Distributional Effects and Macroeconomic Shocks in a Modified Truncated History Approach (with Ulrich Eydam and Maik Heinemann)

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.

The Relationship between Gender Gaps and the Business Cycle (with Denise Barth and Elke Holst)

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.