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Aging, pension reform, and capital flows: A multi-country simulation model

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  • Alexander Ludwig

    ()

  • Joachim Winter

    ()
    (Munich Center for the Economics of Aging (MEA))

Abstract

We present a quantitative analysis of international capital flows induced by differential population aging and pension reform. It is well known that within each country, demographic change alters the time path of aggregate savings. This process may be amplified if pension reform shifts old-age provision towards more pre-funding. While the patterns of population aging are similar in most countries, timing and initial conditions differ substantially. Hence, to the extent that capital is internationally mobile, population aging will induce capital flows between countries. In order to quantify these effects, we develop a multi-country overlapping generations model and use long-term demographic projections for several world regions to project international capital flows in the course of population aging. Our simulations suggest that capital flows from fast-aging industrial countries such as Germany, Italy or Japan to the rest of the world will be substantial. We also conclude that closed-economy models of pension reform miss quantitatively important effects of international capital mobility.

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Paper provided by Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy in its series MEA discussion paper series with number 03028.

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Date of creation: 09 Apr 2003
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Handle: RePEc:mea:meawpa:03028

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