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FEDERAL RESERVE BANK of ATLANTA

WORKING PAPER SERIES

Immigration, Remittances, and Business Cycles

Federico S. Mandelman and Andrei Zlate

Working Paper 2008-25a May 2010

Abstract: We use data on border enforcement and macroeconomic indicators from the United States and Mexico to estimate a two-country business cycle model of labor migration and remittances. The model matches the cyclical dynamics of labor migration to the United States and documents how remittances to Mexico serve an insurance role to smooth consumption across the border. During expansions in the destination economy, immigration increases with the expected stream of future wage gains, but it is dampened by a sunk migration cost that reflects the intensity of border enforcement. During recessions, established migrants are deterred from returning to their country of origin, which places an additional downward pressure on the wage of native unskilled workers. Thus, migration barriers reduce the ability of the stock of immigrant labor to adjust during the cycle, enhancing the volatility of unskilled wages and remittances. We quantify the welfare implications of various immigration policies for the destination economy.

JEL classification: F22, F41

Key words: labor migration, sunk emigration cost, skill heterogeneity, international real business cycles, Bayesian estimation

This paper is a significantly revised version of “Immigration and the Macroeconomy.” The authors acknowledge Gustavo Canavire and Menbere Shiferaw for superb research assistance. They thank their discussants Mario Crucini and Bora Durdu as well as James Anderson, Susanto Basu, Fabio Ghironi, Peter Ireland, Nobuhiro Kiyotaki, Giovanni Peri, Myriam Quispe-Agnoli, B. Ravikumar, Alessandro Rebucci, Pedro Silos, Nicole Simpson, and conference and seminar participants at the NBER Summer Institute (International Finance and Macroeconomics), Bank of Japan, Central Bank of the Philippines, the Atlanta Fed, Federal Reserve Board, the Boston Fed, Georgia Tech, the Inter-American Development Bank, and the University of Delaware, who provided helpful comments. Part of this project was developed while Andrei Zlate was visiting the Federal Reserve Banks of Atlanta and Boston, whose hospitality he gratefully acknowledges. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta, the Board of Governors or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Federico Mandelman, Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8785, Federico.Mandelman@ atl.frb.org, or Andrei Zlate, Board of Governors of the Federal Reserve System, Division of International Finance, 20th Street and Constitution Avenue, N.W., Washington, D.C., 20551, andrei.zlate@frb.gov.

Federal Reserve Bank of Atlanta working papers, including revised versions, are available on the Atlanta Fed’s Web site at www.frbatlanta.org/pubs/WP/. Use the WebScriber Service at www.frbatlanta.org to receive e-mail notifications about new papers.

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