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Demography and Low Frequency Capital Flows

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  • David Backus
  • Thomas Cooley
  • Espen Henriksen

Abstract

We consider the causes of international capital flows. Since capital flows are extremely persistent, we argue that their drivers must be persistent, too. We think the most compelling candidates are demographic trends, tfp differences and financial frictions. In this paper we focus primarily on the role of demography in a multi-country overlapping generations model in which saving decisions are tied to agents' life expectancy. Capital flows reflect differences between saving and investment across countries. Demographic changes affect the aggregate accumulation of assets in two ways: by changing life expectancy which changes individual household saving behavior, and by changing the age distribution of the population by which individual household decisions are aggregated. The most important drivers turn out to be increases in life expectancy caused by decreases in adult mortality.We use a quantitative version of the model to illustrate the impact of demography on capital flows and net foreign assets in China, Germany, Japan, and the United States.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19465.

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Date of creation: Sep 2013
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Handle: RePEc:nbr:nberwo:19465

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Cited by:
  1. Mervyn King & David Low, 2014. "Measuring the ''World'' Real Interest Rate," NBER Working Papers 19887, National Bureau of Economic Research, Inc.

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