Demography and the current account: a case-study of Italy

This paper investigates the role of demography in driving the current account (CA) 'norms' (i.e. the medium-term CA values consistent with economic fundamentals and desired policies) which are estimated by several international institutions. The paper makes two distinct contributions. First, it highlights that the use of population projections sourced from different institutions (namely, the United Nations, Eurostat, and Istat) can significantly alter the size of the positive contribution of demography to CA norms. In particular, for Italy and the other main euro-area economies, CA norm estimates are significantly lower if alternative projections to the more pessimistic UN projections are employed. Second, the paper extends the reference CA model to incorporate labour market indicators, consistently with a life-cycle hypothesis. This improvement results in additional downward revisions to CA norms, especially regarding Italy. Jointly, these findings underscore the importance of exercising great caution when interpreting model-based CA norm estimates for policy evaluation and external imbalance assessments.