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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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Publication status: published as Journal of International Economics Volume 92, Supplement 1, April 2014, Pages S2–S21 36th Annual NBER International Seminar on Macroeconomics Cover image Measuring the effect of the zero lower bound on yields and exchange rates in the U.K. and Germany ☆ Eric T. Swanson, , E-mail the corresponding author, John C. Williams1,
Handle: RePEc:nbr:nberwo:19465
Note: AG IFM
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  1. 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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  12. Robin Brooks, 2003. "Population Aging and Global Capital Flows in a Parallel Universe," IMF Staff Papers, Palgrave Macmillan, vol. 50(2), pages 3.
  13. Ronald Lee & Timothy Miller, 2001. "Evaluating the performance of the lee-carter method for forecasting mortality," Demography, Springer;Population Association of America (PAA), vol. 38(4), pages 537-549, November.
  14. 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.
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  16. Menahem E. Yaari, 1965. "Uncertain Lifetime, Life Insurance, and the Theory of the Consumer," Review of Economic Studies, Oxford University Press, vol. 32(2), pages 137-150.
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