Migration Flows and Capital Movements In Small Open Economies

Abstract

This paper explores the extent to which migration-related capital flows can explain the variation in investment rates and current and capital account imbalances across OECD countries. We begin with a model in which migration is exogenous. Migrants must be equipped with machines, and the resulting demands for capital will generate cross-border flows of capital. Next, we move to an empirical exercise in which we examine the predictions of a simple model in which both capital and labor flows are endogenous. We test this model using data from a panel of OECD countries. Finally, we consider data from a number of recent episodes of plausibly exogenous migration. Taken together, we conclude that migration flows do in fact generate substantial matching capital flows. We then ask how much immigration may have contributed to the increase in the US current account deficit since 1960. Between 1960 and 2000, the US current account declined by about 4% of annual GDP. We calculate that the increase in migration may have accounted for about one-fourth of this decline.