Demography and low-frequency capital flows

Abstract

We verify that fluctuations in international capital flows and stocks are persistent and consider a role for demography. In an overlapping generations model with uncertain lifetimes, we explore the impact of increases in life expectancy caused by decreases in adult mortality. Reductions in mortality affect the aggregate accumulation of assets in two ways: by changing household saving behavior and by changing the age distribution of the population. In an open economy, demographic differences across countries can produce large persistent capital flows, even if the countries are otherwise similar. We use a quantitative version of the model to illustrate the impact of demography on capital flows and net foreign assets in China, Germany, Japan, and the United States. JEL Classification Codes: F21, J11.

Demographics and the Evolution of Global Imbalances

“…Higher frequency fluctuations are still present in the counterfactual as in the baseline. This finding generalizes that of Ferrero (2010) and Backus, Cooley, and Henriksen (2014). Ferrero (2010) demonstrates, in a two-country model of the United States and G6 countries, that demographics are responsible for the persistent increase in the U.S. trade deficit.…”

“…Ferrero (2010) demonstrates, in a two-country model of the United States and G6 countries, that demographics are responsible for the persistent increase in the U.S. trade deficit. Backus, Cooley, and Henriksen (2014) arrive at a similar conclusion in four-country model of China, Germany, and Japan, and the United States. The baseline and counterfactual trade imbalances for all countries are in Figure D.4 in Appendix D.…”

“…The three closest papers on demographics and imbalances are Backus, Cooley, and Henriksen (2014), Ferrero (2010) and Krueger and Ludwig (2007). My paper differs along several margins.…”

“…The first is in how households are modeled. Backus, Cooley, and Henriksen (2014) and Krueger and Ludwig (2007) both study demographics in an open economy with overlapping generations. While such a framework is natural in this context, it limits the analysis to 4 countries in the former and to 3 countries in the latter.…”

Demographic Obstacles to European Growth

“…Previous studies have also recognized the importance of demographic change for capital accumulation. Backus et al (2014), Henriksen andLambert (2009), andFeroli (2003) investigate the effect of demographic change on international capital flows. Gagnon et al (2016), Carvalho et al (2016), and Ikeda and Saito (2014) show the impact of demographic factors on the real interest rate in the United States and Japan.…”