Gains from Migration in a New-Keynesian Framework

This paper presents a simple New-Keynesian small open economy model allowing for labour to be supplied both domestically and abroad with a locational preference to work at home rather than abroad. From this small change in the otherwise standard setup follows an important implication for the Phillips-curve: The opening of the "labour account" reduces the output-in‡ation trade-o¤, i.e. the Phillips-curve becomes ‡atter. The theoretic intuition is simple: Any given boost to output is followed by increasing real wages, marginal costs and thereby in‡ation if labour is the only input to production because workers need to be compensated for a reduction in leisure. However, to the extent to which this additional labour is mobilized from a substitution away from labour formerly supplied abroad, due to an improving real wage di¤erential, there is no need for such a compensation. Hence real wages, marginal costs and in‡ation are less a¤ected by the expansion. JEL Classi…cation: F 22, F41, E 52 Keywords: International migration, open economy New-Keynesian Phillips-curve, monetary policy INCOMPLETE Contact: Freie Universität Berlin, Boltzmannstr. 20, 14195 Berlin, Germany, [email protected]. This work is based on a …rst year paper for the Berlin Doctoral Program of Economics and Management Science written in summer 2005.