Population Aging and International Capital Flows

• Author: Robin Brooks
• Pages: 1-3

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Empirical work suggests that there is a systematic association between demographics and saving and investment. Brooks (1998) uses data for industrial countries to establish that saving rates are negatively related to youth and old age dependency. Chinn and Prasad (2003) use cross-section and panel regressions to investigate the medium-term determinants of current accounts around the world using data for 18 industrial and 71 developing countries. They find that youth and old age dependency are negatively associated with current account balances.

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The IMF (2004) confirms these results, based on the empirical relationship between demographics and saving and investment for 115 countries from 1960 to 2000, and explores how projected population trends may affect current account positions going forward. It finds that in advanced countries, the aging of populations will result in deteriorating current account balances. For Japan, the effect could be around 2.5 percent of GDP by 2050. For Europe, it would be smaller, at less than 0.5 percent of GDP over the same period. The major exception is the United States, where it is predicted that demographic effects will boost the current account by more than 1 percent of GDP. Elsewhere, demographic change could contribute to an improvement in Africa (close to 3 percent) and the Middle East (around 0.5 percent), but a deterioration in central and eastern Europe (around 1 percent) and emerging Asia (less than 0.5 percent). Heller and Symansky (1997), surveying the existing literature, forecast how the aging of populations will affect the "Asian tiger" countries. These countries will contribute to world saving as their populations move into prime saving years. Beyond 2025, however, they will drag down the global saving rate, as their populations begin to dissave in retirement.

The empirical analysis discussed above, however, is constrained by the fact that an important equilibrium condition-that saving must equal investment at the global level- is difficult to impose. In addition, historical correlations may not reflect causality. To address these issues, Brooks (2003) simulates the effects of population change on external balances in an overlapping generations model with eight regions. The model explicitly incorporates the population age structure and assumes that households accumulate wealth as they work to finance consumption in retirement. Capital is assumed to be perfectly mobile across...