The Dual Role of Migration - Insurance and Volatility in the Schengen Area 

(With Jesus Fernández-Villaverde, Galo Nuño, and Maximilian Vogler)

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Changes in net migration are a key, but often overlooked, margin through which economies absorb aggregate shocks. This mechanism is particularly important for countries within free movement zones like the Schengen Area in Europe. After a country receives an asymmetric negative aggregate shock, its citizens can easily migrate to other countries in the free movement zone, lowering labor supply locally and increasing it abroad. We empirically show that changes in net migration were, in fact, a major adjustment margin during the European Debt Crisis of 2009-2014. In order to understand the implications of these migration patterns, measure their welfare implications, and gauge their consequences for optimal policy design, we build a large scale business cycle model of the Schengen Area that incorporates migration decisions across different countries. This naturally gives rise to a high-dimensional problem, which the previous migration literature was not able to solve due to the “curse of dimensionality”. By applying the deep learning algorithm developed in Fernández-Villaverde, Nuño, Sorg-Langhans, and Vogler (2020), we overcome this “curse of dimensionality.” We investigate the propagation of economic shock in this model. A vital aspect of our investigation is taking into account the effect of the composition and size of the union. Interestingly, through its membership in such a zone, a country can import or export a substantial amount of unemployment, even in the absence of domestic shocks. This implies that the composition of the migration zone matters, as countries with volatile business cycles receive insurance from the membership while those with more stable business cycles can import volatility.