ESSAYS ON A SMALL OPEN ECONOMY WITH CROSS-BORDER LABOR MOBILITY

Author

Sokchea Lim, Southern Illinois University CarbondaleFollow

Date of Award

8-1-2013

Degree Name

Doctor of Philosophy

Department

Economics

First Advisor

Morshed, AKM Mahbub

Abstract

The dissertation examines the macroeconomic impact of fiscal policy, including a recently-debated remittance tax in a small open economy that exports migrant workers and, at the same time, receives remittances sent by those migrants to families in the home country. The research also investigates the responses of optimal fiscal policy to shocks in either the home or the host country. Then, the empirical exercises are performed to determine the motivations behind remittances. More specifically, we test whether remittances come from existing migrants or result from migration when families at home experience income contraction caused by weather or natural disaster shocks. Chapter 1 provides some interesting findings. First, the results show that an economy with international migration is more resilient to demand shocks resulting from fiscal contraction. Second, the short-run association between remittances and domestic output depends on the sources of the shocks. Third, our results indicate that the equilibrium impact of a tax on remittances can be expansionary and welfare-improving when an economy is initially close to full employment. The presence of utility-enhancing government expenditures and a potential negative externality from over-allocation of labor abroad (over migration) justify the presence of distortionary taxes. Chapter 2 shows that an increase in remittances due to shocks in the host country increases consumption, but reduces domestic output due to labor migration. In such a case, optimal fiscal policy responds by lowering taxes on factor incomes to encourage domestic labor participation and increasing the remittance tax to curb labor migration. However, optimal policy response to shocks in the domestic economy is to raise all income taxes including factor incomes and remittances. Chapter 3 shows that there is no evidence that supports pure altruism hypothesis. Specifically, home income contraction due to natural disasters or weather shocks does not appear to induce existing migrants residing abroad to send more remittances. However, the results indicate that remittances increase as people experiencing the income shocks migrate to earn higher income abroad. The findings support our theoretical specification in the previous chapters that links remittances to international migration.