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Abstract

We present a quantitative analysis of the effects of population aging and pension reform on international capital markets. First, demographic change alters the time path of aggregate savings within each country. Second, this process may be amplified when a pension reform shifts old-age provision towards more pre-funding. Third, 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. All three effects influence the rate of return to capital and interact with the demand for capital in production and with labor supply. In order to quantify these effects, we develop a computational general equilibrium model. We feed this multi-country overlapping generations model with detailed long-term demographic projections for seven world regions. Our simulations indicate that capital flows from fast-aging regions to the rest of the world will initially be substantial but that trends are reversed when households decumulate savings. 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 04064.

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Date of creation: 11 Nov 2004
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Handle: RePEc:mea:meawpa:04064

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Postal: Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy, Amalienstraße 33, 80799 München, Germany
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Find related papers by JEL classification:

• E27 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
• F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
• G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
• H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
• J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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