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The Impact of Immigration on Public Debt: A Dynamic Macroeconomic Analysis

Sultanov, Azar (2021). The Impact of Immigration on Public Debt: A Dynamic Macroeconomic Analysis. (Unpublished Doctoral thesis, City, University of London)


In this thesis we extend both DSGE and VECM models to study the economic impact of immigration and other demographic changes and how these relate to dynamic fiscal policy.

The first chapter extends the Dynamic Stochastic General Equilibrium (DSGE) model to also incorporate overlapping infinite-lived dynasties and considers what this richer demographic structure implies about both immigration policy and how immigration may influence policy makers willingness to rely on deficit finance. We extend previous work incorporating overlapping infinite-lived dynasties into a neoclassical growth model facilitating more robust welfare analysis of immigration policy to include endogenous labour supply, by assuming agents have GHH preferences—an approach that makes these types of models aggregable without generating a negative labour supply. This makes for a much richer general equilibrium analysis of factor taxation, public debt, government consumption, transfer payments and changes to immigration with a particular focus on the welfare of the incumbent population.

The second chapter focuses on Bayesian estimation and evaluation of the DSGE model with overlapping dynasties extended to incorporate a rich description of fiscal policy and immigration, to examine the debt dynamics using US data. By estimating a DSGE model that incorporates a detailed description of fiscal policy and immigration, we can estimate how government debt has been financed historically. Moreover, we can examine how adjustments in each fiscal instrument and immigration have affected the observed equilibrium. To accurately predict the impact of fiscal policy and immigration, it is essential to understand the magnitude and speed of their response to debt. The model is rich enough to provide a satisfactory empirical account of the impact of immigration in the US, and exogenous iii shocks reflect unanticipated changes in fiscal policy and immigration to assess the role of these shocks in explaining the variance of the model’s endogenous variables. Results for the policy parameter estimates indicate that several distortionary fiscal instruments have played an essential role in financing debt innovations. Although the response of capital taxes to debt innovations are highest, the response of other fiscal instruments and immigration are also important. Effect of an increase in immigration in the short-run dilute capital and hence lower per capita output, consumption, and tax receipts. However, we can observe a modest short-term rise in hours worked, government spending, and transfers. Immigration appears to have only a little short-run impact on real wages and output, while there is a positive reaction of interest rates and debt to immigration shocks. Government spending, transfers, investment and hours worked together with investment-specific and technology shocks have been a significant driver of immigration. However, response of immigration to consumption, labour and capital income tax shocks are negative. Results indicate that innovations to the flow of immigration have relatively little impact on the US economy. This is largely due to the long-run adjustment the economy undergoes when it absorbs immigrants and to the fact that we only measure the impact of changes to the flow of immigrants, not the impact of the flow itself or the stock of immigrants that accumulates over time.

The final chapter investigates the relationship between immigration and fiscal policy by estimating with US data a structural vector error correction model (SVECM) that provides a new practical approach with many advantages over conventional VAR analysis. As there are only a few papers that investigate the macroeconomic effects of immigration using time series techniques this study is unique in evaluating the long-run as well as the contemporaneous impact of immigration on debt formation and fiscal sustainability. We incorporate the government budget constraint within the empirical model to capture the long-run relationship and dynamic interactions between government spending, tax revenues, debt, interest rate and immigration. By isolating and assessing the impact of immigration on debt and fiscal financing, we can examine debt stabilizing changes in fiscal policy that can be attributed to immigration in the short and long horizon. This macroeconometric model generates results largely comport with the prediction generated by the more theoretical approaches in Chapters 1 and 2. The main findings are iv as follows. Immigration shocks are of minor importance for the US economy. The number of immigrants (flow) in any given year is not significant, which explains the magnitude of the impact. While the arrival of immigrants is associated with an initial dilution of public debt, in the long-run, this relationship is reversed. Immigration, although contributing to the increase of debt, on the other hand, can help to lessen the burden of public debt for the descendants of the natives in the US. Immigration may also help to alleviate the demographic problems through a positive long-term contribution to the revenues and thus to the welfare of the native population. Overall, the empirical model captures well the dynamics following immigration shocks predicted by the theoretical model developed in Chapter 1.

Publication Type: Thesis (Doctoral)
Subjects: H Social Sciences > HG Finance
J Political Science > JV Colonies and colonization. Emigration and immigration. International migration
Departments: Doctoral Theses
School of Policy & Global Affairs > Economics
School of Policy & Global Affairs > School of Policy & Global Affairs Doctoral Theses
[thumbnail of Thesis_ASultanov.pdf] Text - Accepted Version
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