Migration and sovereign default risk

During sovereign debt crises, countries experience persistent economic declines, spiking spreads, and outflows of capital and workers. To account for these salient features, we develop a sovereign default model with migration and capital accumulation. The model has a two-way feedback. Default risk lowers workers' welfare and induces emigration, which in turn intensifies default risk by lowering tax base and investment. Compared with a nomigration model, our model produces higher default risk, lower investment, and a more profound and prolonged recession. We find that migration accounts for almost all of the lack of recovery in GDP during the recent Spanish debt crisis. (C) 2020 Elsevier B.V. All rights reserved.