Population aging, relative prices and capital flows across the globe

This paper develops a multi-country two-sector overlapping-generations model to study the impact of demographic change on the relative price of nontradables and current account balances. An aging population expands the relative demand for nontradables, exerting upward pressure on their relative price (structural transformation), and entails a willingness to save more, as households discount higher survival probabilities, and invest less, as firms face increasing labor scarcity. The general equilibrium reduction of the real interest rate (secular stagnation) dampens the increase in the relative price as savings become less profitable, thus lowering consumption at older ages. The model robustly predicts that faster-aging countries will face greater increases in the relative price of nontradables and unprecedented accumulations of net foreign asset positions (global imbalances) over the twenty-first century.