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Demography and Low Frequency Capital Flows

  • David Backus
  • Thomas Cooley
  • Espen Henriksen

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
Note: AG IFM
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  1. Keyu Jin & Stéphane Guibaud & Nicolas Coeurdacier, 2013. "Credit constraints and growth in a global economy," LSE Research Online Documents on Economics 54261, London School of Economics and Political Science, LSE Library.
  2. Shang-Jin Wei & Xiaobo Zhang, 2011. "The Competitive Saving Motive: Evidence from Rising Sex Ratios and Savings Rates in China," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 511 - 564.
  3. Attanasio, Orazio & Kitao, Sagiri & Violante, Giovanni L., 2007. "Global demographic trends and social security reform," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 144-198, January.
  4. Gary Hansen & Selahattin Imrohoroglu, 2008. "Consumption over the Life Cycle: The Role of Annuities," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 566-583, July.
  5. Dennis Tao Yang & Junsen Zhang & Shaojie Zhou, 2011. "Why Are Saving Rates so High in China?," NBER Working Papers 16771, National Bureau of Economic Research, Inc.
  6. Charles Engel & John H. Rogers, 2006. "The U.S. current account deficit and the expected share of world output," International Finance Discussion Papers 856, Board of Governors of the Federal Reserve System (U.S.).
  7. Carter, Lawrence R. & Lee, Ronald D., 1992. "Modeling and forecasting US sex differentials in mortality," International Journal of Forecasting, Elsevier, vol. 8(3), pages 393-411, November.
  8. Marcos D. Chamon & Eswar S. Prasad, 2010. "Why Are Saving Rates of Urban Households in China Rising?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 93-130, January.
  9. Martin Floden & David Domeij, 2004. "Population Aging and International Capital Flows," 2004 Meeting Papers 490, Society for Economic Dynamics.
  10. Robin Brooks, 2003. "Population Aging and Global Capital Flows in a Parallel Universe," IMF Staff Papers, Palgrave Macmillan, vol. 50(2), pages 3.
  11. Carsten A Holz, 2005. "New Capital Estimates for China," Macroeconomics 0512001, EconWPA.
  12. John Bongaarts, 2004. "Population Aging and the Rising Cost of Public Pensions," Population and Development Review, The Population Council, Inc., vol. 30(1), pages 1-23.
  13. Lee E. Ohanian & Mark L. J. Wright, 2010. "Capital Flows and Macroeconomic Performance: Lessons from the Golden Era of International Finance," American Economic Review, American Economic Association, vol. 100(2), pages 68-72, May.
  14. 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.).
  15. Ronald Lee & Timothy Miller, 2001. "Evaluating the performance of the lee-carter method for forecasting mortality," Demography, Springer, vol. 38(4), pages 537-549, November.
  16. Ferrero, Andrea, 2010. "A structural decomposition of the U.S. trade balance: Productivity, demographics and fiscal policy," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 478-490, May.
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