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Asymmetric demographic shocks and institutions: The impact on international capital flows and welfare

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  • Arezki, Rabah

Abstract

This paper examines the consequences of an asymmetric negative fertility shock on capital formation, saving/investment imbalance, and welfare. The framework of analysis is a Diamond-type overlapping-generations small open economy with capital market imperfection. The capital market imperfection is modelled through a symmetric wedge between foreign investor and domestic investor return on capital. The shock is transmitted to the small open economy depending on whether the wedge is below a given threshold. If the wedge is not too high, capital first flows in the small open economy to exploit the di¤erence in returns on capital. After the shock has occurred, capital is repatriated in order to �nance the old age consumption of rest of the world investors. If capital flows internationally, lifetime utility in the small open economy decreases unambiguously for individuals born one period before the shock occurs. Provided that the small open economy is initially below its golden rule, individuals born after the time the shock has occurred experience an increase in their lifetime utility.

Suggested Citation

  • Arezki, Rabah, 2010. "Asymmetric demographic shocks and institutions: The impact on international capital flows and welfare," MPRA Paper 27683, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:27683
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    File URL: https://mpra.ub.uni-muenchen.de/27683/1/MPRA_paper_27683.pdf
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    References listed on IDEAS

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    1. Higgins, Matthew, 1998. "Demography, National Savings, and International Capital Flows," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 343-369, May.
    2. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May.
    3. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
    4. Shleifer, Andrei & Wolfenzon, Daniel, 2002. "Investor protection and equity markets," Journal of Financial Economics, Elsevier, vol. 66(1), pages 3-27, October.
    5. Turalay Kenc & Serdar Sayan, 1998. "Transmission of Demographic Shock Effects from Large to Small," GE, Growth, Math methods 9804001, EconWPA.
    6. Rabah, Arezki, 2011. "Demography, credit and institutions: A global perspective," Emerging Markets Review, Elsevier, vol. 12(2), pages 79-93, June.
    7. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 83-116.
    8. Galor, Oded, 1986. "Time preference and international labor migration," Journal of Economic Theory, Elsevier, vol. 38(1), pages 1-20, February.
    9. Barry P. Bosworth & Ralph C. Bryant & Gary Burtless, 2004. "The Impact of Aging on Financial Markets and the Economy: A Survey," Working Papers, Center for Retirement Research at Boston College 2004-23, Center for Retirement Research.
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    Cited by:

    1. Rabah, Arezki, 2011. "Demography, credit and institutions: A global perspective," Emerging Markets Review, Elsevier, vol. 12(2), pages 79-93, June.
    2. Fedotenkov, I., 2012. "Pensions and ageing in a globalizing world. International spillover effects via trade and factor mobility," Other publications TiSEM 8830bc21-4138-4479-8459-a, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

    population aging; capital market imperfection; open economy; capital flows; welfare;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • J10 - Labor and Demographic Economics - - Demographic Economics - - - General
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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