Demographic Trends, Fiscal Policy and Trade Deficits
In this paper, I argue that demographic factors play a central role in accounting for the trade deficit experienced by the U.S. during the last three decades. The main idea is that cross-country demographic differentials lead to adjustments in savings and investments which are associated with international capital flows towards relatively young and rapidly growing economies. I develop a tractable two-country framework with life-cycle structure that formalizes this intuition. The model permits to illustrate analytically and quantitatively the contribution of demographic variables in determining the equilibrium trade balance. I show that persistent differences in population aging can explain a significant fraction of the negative trend in the U.S. trade balance. Notably, the explicit consideration of the demographic transition also helps to reconcile the dynamics of the trade balance with the evolution of the U.S. fiscal deficits and generates a declining pattern for the real interest rate broadly consistent with the data
|Date of creation:||03 Dec 2006|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Schmitt-Grohe, Stephanie & Uribe, Martin, 2003.
"Closing small open economy models,"
Journal of International Economics,
Elsevier, vol. 61(1), pages 163-185, October.
- Roger E. A. Farmer, 1990. "RINCE Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 43-60.
- Roger E.A. Farmer, 1989. "Rince Preferences," UCLA Economics Working Papers 547, UCLA Department of Economics.
- Juillard, Michel, 1996. "Dynare : a program for the resolution and simulation of dynamic models with forward variables through the use of a relaxation algorithm," CEPREMAP Working Papers (Couverture Orange) 9602, CEPREMAP.
- Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
- Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
- Robin Brooks, 2003. "Population Aging and Global Capital Flows in a Parallel Universe," IMF Staff Papers, Palgrave Macmillan, vol. 50(2), pages 1-3.
- Ghironi, Fabio, 2006. "Macroeconomic interdependence under incomplete markets," Journal of International Economics, Elsevier, vol. 70(2), pages 428-450, December.
- Fabio Ghironi, 2000. "Macroeconomic Interdependence under Incomplete Markets," Boston College Working Papers in Economics 471, Boston College Department of Economics, revised 07 Feb 2003.
- Evans, Paul, 1987. "Do budget deficits raise nominal interest rates? : Evidence from six countries," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 281-300, September.
- Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:red:sed006:444. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.