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EQUILIBRIUM INDETERMINACY IN ONE-SECTOR SMALL OPEN ECONOMIES: THE ROLE OF INTERNATIONAL LABOR MIGRATION

Published online by Cambridge University Press:  20 July 2017

Carmelo P. Parello
Carmelo P. Parello*
Affiliation:
Sapienza University of Rome
*
Address correspondence to: Carmelo P. Parello, Department of Economics and Law, Sapienza University of Rome, Via del Castro Laurenziano 9, I-00161, Rome, Italy; e-mail: carmelo.parello@uniroma1.it.
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Abstract

This paper presents a Ramsey-like dynamic small open economy with endogenous labor migration. In the model, the domestic economy is free to borrow or lend as much as it wants at the given world interest rate, and individuals are supposed to be free to move from a country to another in response to the emergence of a wage differential between countries. Our analysis can be ideally split in two parts. Initially, we propose a baseline model in which only natives are allowed to save and invest in capital assets and traded bonds, whereas immigrants are credit constrained. Next, we provide an extension in which all individuals, including immigrants, have full access to international financial markets. We find that the steady state is always local indeterminate, and that the adjustment dynamics of the competitive equilibrium is dependent upon the initial level of the immigration ratio.

Keywords

IndeterminacyInternational MigrationSmall Open Economy
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 4 , June 2019 , pp. 1528 - 1562
Copyright
Copyright © Cambridge University Press 2017 

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Footnotes

I would like to thank two anonymous referees for very helpful comments and suggestions. This paper also benefited from presentations at the 4th Joint IOS/APB Summer Academy on Central and Eastern Europe, the 53rd SIE Annual Scientific Meeting, University of Bologna, and 18th INFER Annual Conference for useful comments and suggestions. Financial support from Sapienza University of Rome, “Progetto di ricerca di Università – prot. C26A135SSH,” is gratefully acknowledged.

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