Global demographic change and international capital flows: Theory and empirics

Crawford School of Public Policy

Event details

ACDE Seminar

Date & time

Tuesday 01 March 2022
2.00pm–3.30pm

Venue

Weston Theatre , Crawford School of Public Policy, No 132, Lennox Crossing, The ANU

Speaker

Weifeng Larry Liu, Australian National University

Hybrid event - online via Zoom and in person at Weston Theatre.

While population has been aging globally, regions and countries are significantly asymmetric in the timing and speed of the demographic transitions, especially between developed and developing regions. This paper explores the impacts of asymmetric demographic change on international capital flows with two contributions. First, the paper introduces demographic structure and pension systems into a theoretical overlapping-generation model of a small open economy, and derives an analytical solution which links a set of factors to the current account. This framework enables tractable analysis of the effects of various demographic shocks on external balances, and also of the interaction between demographic shocks and productivity growth and pension systems. Second, the paper provides a comprehensive literature review of both modelling and empirical studies. There are several implications. First, the patterns of capital flows depend on the nature of demographic shocks (permanent or transitory; fertility or mortality) and also on the stage of demographic shocks. Second, less generous pension systems tend to increase national saving and drive capital outflows. Third, financial frictions such as borrowing constraints of young people tend to increase national saving and drive capital outflows. Fourth, production and trade specialization in labor-intensive sectors tends to decrease investment and drive capital outflows in the face of fertility growth. Fifth, the magnitude of the demographic effects depends on the extent of cross-border mobility of capital, labor and goods. On the other hand, empirical studies strongly support that the demographic change since the second half of last century has statistically significant effects on the current account balance. The current account tends to decrease in the dependency ratio and increase in the working-age population share.

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