Effects of Fiscal Policy under Free Factor Migration

Abstract

The effects of fiscal policy are examined in a neo-Keynesian macroeconomic model under perfect factor mobility. The key finding is that, even in the classical regime of the model, fiscal policy may have real effects: a positive policy shock motivates emigration of labour and immigration of capital and vice versa. The effect on labour migration is the stronger the higher are the local adjustment costs as compared to the mobility costs. The effect on capital migration is clear as far as the real interest rate is the relevant market parameter.