Capital Flows Among the G-7 Nations: A Demographic Perspective

Abstract

The standard life-cycle model of consumption behavior predicts that a household's age will influence its saving behavior. Moreover, simple national accounting identities reveal that a country's current account balance reflects its savings-investment imbalance. Thus, differences in national age-profiles should affect the current account. To test this theory's plausibility and significance, I simulate a multi-region overlapping generations model that is calibrated to match the demographic differences among the major industrialized countries over the past 50 years. In the model, it is found that these differences can explain some of the observed long-term capital movements in the G-7. In particular, the model does a good job of predicting the size and timing of American current account deficits as well as Japanese current account surpluses.

Population Aging and International Capital Flows*

“…When excluding developing countries, our model predicts capital flows for the United States and Japan that are similar to those in Feroli (2003) and Henriksen (2002). Neither Feroli nor Henriksen allows for capital flows to developing countries.…”

Ageing, Pension Reform and Capital Flows: A Multi‐Country Simulation Model

“…Second, our analysis is related to several recent papers that compare implications for capital flows predicted by OLG models with actual current account data (see e.g. Brooks 2003;Feroli, 2002;Henriksen 2002;Domeij and Floden 2006). Their analyses, and our own, show that calibrated OLG models explain a good proportion of the low frequency movements of international capital flows observed in the data.…”

“…More recently, several authors developed large-scale multi-country OLG models to study the effects of population ageing and pension reform on international capital flows. While Attanasio and Violante (2000) focus on how the Latin American demographic transition affects international capital markets, Brooks (2003), Feroli (2002), Henriksen (2002) and Domeij and Floden (2006) examine capital flows in multi-regional OLG models.…”

Fertility and the Real Exchange Rate

“…Börsch-Supan, Ludwig, and Winter (2002) use simulations to study pension reform and international capital flows that stem from population aging in a multi-country overlapping generations model. Feroli (2003) also uses theory and simulation techniques and finds that demographic differences can explain much of the size and timing of some key current account imbalances; see also Ferrero (2007).…”