Equipping Immigrants: Migration Flows and Capital Movements

The large current account and capital account imbalances among OECD countries continue to attract attention among policy makers and researchers. This paper explores the extent to which migration-related capital flows can explain the movements and magnitudes of current and capital account imbalances in OECD countries. Migrants must be equipped with machines, and the resulting demands for capital are likely, all else being equal, to generate cross-border flows of capital. We analyze the empirical predictions of a simple model with endogenous capital and labor flows. This model allows for exogenous variation in the supply of capital and labor as well as in local production conditions. Empirically, we find that the observed correlation in investment rates, capital and labor flows are roughly consistent with a model in which capital is elastically supplied at a constant world interest rate, but where the supply of migrants to local economies varies exogenously. We then examine how much the increase in net migration rates 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. The increase in migration contributed about 1% of GDP to this decline.