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Demographic Trends, Fiscal Policy and Trade Deficits

  • Andrea Ferrero

    ()

    (Economics New York University)

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

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File URL: http://repec.org/sed2006/up.31420.1139942793.pdf
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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 444.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:444
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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  1. Hurd, Michael D, 1989. "Mortality Risk and Bequests," Econometrica, Econometric Society, vol. 57(4), pages 779-813, July.
  2. Attanasio Orazio P. & Gianluca Violante, 1999. "Global Demographic Trends and Social Security Reform," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.
  3. Domeij, David & Flodén, Martin, 2003. "Population Aging and International Capital Flows," SSE/EFI Working Paper Series in Economics and Finance 539, Stockholm School of Economics, revised 21 Oct 2003.
  4. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
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