On the Response of Inflation and Monetary Policy to an Immigration Shock

Benjamín García and Juan Guerra-Salas

Accepted at the Journal of Human Capital.

Central Bank of Chile Working Paper 872. April 2020.

Abstract: An immigration shock has an ambiguous effect on inflation, since there are multiple channels working in both directions. Cross-country empirical evidence on Venezuelan immigration in Latin America points to a net disinflationary effect. We study immigration and inflation in a general-equilibrium model with search frictions in the labor market, which we calibrate to Chile, an emerging country that has experienced substantial immigration in recent years. A net disinflationary effect is consistent with a labor supply channel dominating an aggregate demand channel. We also find that the systematic response of monetary policy is quantitatively important for the propagation of the shock.

Keywords: Immigration; Inflation; Monetary Policy; DSGE models; Small open economies.

JEL classification codes: E24; E52; F22; F41; J61.

Non-technical summary in Investigación al Día, the Central Bank of Chile’s quarterly research bulletin (in Spanish).