Productivity Shocks, VAT Hikes and Emigration



Motivated by fiscal austerity and the surge in emigration in Europe’s periphery during the Great Recession Bandeira, Caballé and Vella study a particular type of fiscal consolidation: the one carried out through an increase in consumption tax rates. Using a small open economy model with search and matching frictions, endogenous migration and sticky prices, they find that VAT hikes induce a fall in consumption, which reduces labour demand and increases emigration. The departure of emigrants reinforces the fall in internal demand and employment, and therefore unemployment costs of VAT hikes over time can be higher than in an economy without migration. However, these effects are significantly smaller than in the case of labour income tax hikes. The authors also study the output and unemployment effects of negative productivity shocks in the presence of labour mobility.


Tax-based consolidation VAT hikes Productivity Emigration Matching frictions 



Caballé acknowledges financial support through the MICINN/FEDER grant PGC2018-094364-B-I00, and the grant 2017SGR1765 from the Generalitat de Catalunya. Vella acknowledges financial support through the EU Horizon 2020 Marie Sklodowska-Curie Grant 798015 (EuroCrisisMove). The views expressed here in no way reflect those of the NSW Treasury.


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Copyright information

© The Author(s) 2020

Authors and Affiliations

  1. 1.New South Wales TreasurySydneyAustralia
  2. 2.Universitat Autònoma de BarcelonaBarcelonaSpain
  3. 3.Barcelona GSEBarcelonaSpain
  4. 4.University of SheffieldSheffieldUK
  5. 5.MOVEBarcelonaSpain

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