Optimal Budget Deficits and Immigration
Johannes Kepler University of Linz, Economics Working Paper No. 0619
Posted: 5 Jun 2008
Date Written: October 1, 2006
Abstract
The paper shows that immigration can create an incentive for deficit-spending among natives. If immigrants use up some given share of public funds net of debt service, a policy of running budget deficits becomes optimal. The optimal budget deficits are higher, the higher the share of net public funds spent exogenously on foreigners. I take the share of immigrants in the total population as a proxy for exogenous spending on immigrants and estimate its effect on budget deficits for 20 OECD countries during 1980-1995. I find the effect to be significant and positive, suggesting that exogenous spending was increasing during that time.
Keywords: optimal budget deficits, immigration, tax-smoothing
JEL Classification: H62, H63, F22
Suggested Citation: Suggested Citation