Migration and Business Cycle Dynamics

Shocks to net migration matter for the business cycles of some countries. Using an
estimated dynamic stochastic general equilibrium (DSGE) model of a small open
economy and a structural vector autoregression, we find that migration shocks account
for a considerable proportion of the variability of per capita GDP. Migration shocks
matter for the capital investment and consumption components of per capita GDP, but
they are not the most important driver. Migration shocks are also important for residential
investment and real house prices, but other shocks play a larger role in driving housing
market volatility. In the DSGE model, the level of human capital possessed by migrants
relative to that of locals materially affects the business cycle impact of migration. The
impact of migration shocks is larger when migrants have substantially different levels of
human capital relative to locals. When the average migrant has higher levels of human
capital than locals, as seems to be common in most OECD economies, a migration
shock has an expansionary effect on per capita GDP and its components.