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On the Consequences of Demographic Change for Rates of Returns to Capital, and the Distribution of Wealth and Welfare

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Dirk Krueger
Alexander Ludwig

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Abstract

This paper employs a multi-country large scale Overlapping Generations model with uninsurable labor productivity and mortality risk to quantify the impact of the demographic transition towards an older population in industrialized countries on world-wide rates of return, international capital flows and the distribution of wealth and welfare in the OECD. We find that for the U.S. as an open economy, rates of return are predicted to decline by 86 basis points between 2005 and 2080 and wages increase by about 4.1%. If the U.S. were a closed economy, rates of return would decline and wages increase by less. This is due to the fact that other regions in the OECD will age even more rapidly; therefore the U.S. is "importing" the more severe demographic transition from the rest of the OECD in the form of larger factor price changes. In terms of welfare, our model suggests that young agents with little assets and currently low labor productivity gain, up to 1% in consumption, from higher wages associated with population aging. Older, asset-rich households tend to lose, because of the predicted decline in real returns to capital.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12453.

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Date of creation: Aug 2006
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Handle: RePEc:nbr:nberwo:12453

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Find related papers by JEL classification:
C68 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computable General Equilibrium Models
D33 - Microeconomics - - Distribution - - - Factor Income Distribution
E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation
E25 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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References listed on IDEAS
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  1. Bloom, David E & Williamson, Jeffrey G, 1998. "Demographic Transitions and Economic Miracles in Emerging Asia," World Bank Economic Review, Oxford University Press, vol. 12(3), pages 419-55, September.
    Other versions:
  2. Axel Boersch-Supan & Alexander Ludwig & Joachim Winter, 2005. "Aging, Pension Reform, and Capital Flows: A Multi-Country Simulation Model," NBER Working Papers 11850, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The intertemporal approach to the current account," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 34, pages 1731-1799 Elsevier. [Downloadable!] (restricted)
    Other versions:
  4. Robin Brooks, 2003. "Population Aging and Global Capital Flows in a Parallel Universe," IMF Staff Papers, Palgrave Macmillan Journals, vol. 50(2), pages 3. [Downloadable!] (restricted)
  5. Juan Carlos Conesa & Dirk Krueger, 2005. "On the Optimal Progressivity of the Income Tax Code," CFS Working Paper Series 2005/10, Center for Financial Studies. [Downloadable!]
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  6. Christopher Carroll, 2005. "The Method of Endogenous Gridpoints for Solving Dynamic Stochastic Optimization Problems," Economics Working Paper Archive 520, The Johns Hopkins University,Department of Economics. [Downloadable!]
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  7. Michael Feroli, 2003. "Capital flows among the G-7 nations: a demographic perspective," Finance and Economics Discussion Series 2003-54, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  8. Domeij, David & Flodén, Martin, 2003. "Population Aging and International Capital Flows," Working Paper Series in Economics and Finance 539, Stockholm School of Economics, revised 21 Oct 2003. [Downloadable!]
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  9. Ayse Imrohoroglu & Selahattin Imrohoroglu & Douglas H. Joines, 1999. "Social Security in an Overlapping Generations Economy with Land," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 638-665, July. [Downloadable!] (restricted)
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  10. Storesletten, Kjetil & Telmer, Christopher I. & Yaron, Amir, 2004. "Consumption and risk sharing over the life cycle," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 609-633, April. [Downloadable!] (restricted)
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  11. Andrew B. Abel, 2003. "The Effects of a Baby Boom on Stock Prices and Capital Accumulation in the Presence of Social Security," Econometrica, Econometric Society, vol. 71(2), pages 551-578, March. [Downloadable!] (restricted)
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  12. Juan C. Conesa & Dirk Krueger, 1999. "Social Security Reform with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 757-795, October. [Downloadable!] (restricted)
  13. Hans Fehr & Sabine Jokisch & Larry Kotlikoff, 2003. "The Developed World's Demographic Transition - the Roles of Capital Flows, Immigration, and Policy," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-133, Boston University - Department of Economics. [Downloadable!]
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  14. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September. [Downloadable!] (restricted)
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  15. Axel Boersch-Supan & Alexander Ludwig, 2005. "Aging, pension reform, and capital flows: A multi-country simulation model," Computing in Economics and Finance 2005 123, Society for Computational Economics. [Downloadable!]
  16. Orazio Attanasio & Sagiri Kitao & Giovanni L. Violante, 2006. "Quantifying the Effects of the Demographic Transition in Developing Economies," Advances in Macroeconomics, Berkeley Electronic Press, vol. 6(1), pages 1298-1298. [Downloadable!] (restricted)
  17. Hansen, G.D., 1991. "The Cyclical and Secular Behavior of the Labor Input : Comparing Efficiency Units and Hours Worked," Papers 36, California Los Angeles - Applied Econometrics.
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  18. Alexander Ludwig, 2005. "Moment estimation in Auerbach-Kotlikoff models: How well do they match the data?," MEA discussion paper series 05093, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim. [Downloadable!]
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  20. repec:cup:macdyn:v:1:y:1997:i:1:p:7-44 is not listed on IDEAS
  21. Alexander Ludwig, 2005. "Moment estimation in Auerbach-Kotlikoff models: How well do they match the data?," MEA discussion paper series 05093, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim. [Downloadable!]
  22. Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer, vol. 6(1), pages 83-114, June.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Burkhard Heer, 2007. "On the Modeling of the Income Distribution Business Cycle Dynamics," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  2. Mario Catalán & Jaime Guajardo & Alexander W. Hoffmaister, 2008. "Global Aging and Declining World Interest Rates: Macroeconomic Insurance Through Pension Reform in Cyprus," IMF Working Papers 08/98, International Monetary Fund. [Downloadable!]
  3. James Poterba & Steven Venti & David A. Wise, 2007. "The Decline of Defined Benefit Retirement Plans and Asset Flows," NBER Working Papers 12834, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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