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Demographic Trends, Fiscal Policy and Trade Deficits

Author

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  • Andrea Ferrero

    () (Economics New York University)

Abstract

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

Suggested Citation

  • Andrea Ferrero, 2006. "Demographic Trends, Fiscal Policy and Trade Deficits," 2006 Meeting Papers 444, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:444
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    File URL: http://repec.org/sed2006/up.31420.1139942793.pdf
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    References listed on IDEAS

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    1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    2. Roger E. A. Farmer, 1990. "RINCE Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 43-60.
    3. Robin Brooks, 2003. "Population Aging and Global Capital Flows in a Parallel Universe," IMF Staff Papers, Palgrave Macmillan, vol. 50(2), pages 1-3.
    4. 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.
    5. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March.
    6. Ghironi, Fabio, 2006. "Macroeconomic interdependence under incomplete markets," Journal of International Economics, Elsevier, vol. 70(2), pages 428-450, December.
    7. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
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    Cited by:

    1. Douglas Laxton & Michael Kumhof, 2007. "A Party without a Hangover? On the Effects of U.S. Government Deficits," IMF Working Papers 07/202, International Monetary Fund.
    2. Castro, Gabriela & Maria, José R. & Félix, Ricardo Mourinho & Braz, Cláudia Rodrigues, 2017. "Aging And Fiscal Sustainability In A Small Euro Area Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 21(07), pages 1673-1705, October.

    More about this item

    Keywords

    External Imbalances; Aging; Fiscal Deficits;

    JEL classification:

    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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