Demographics and the Evolution of Global Imbalances

The age distribution evolves asymmetrically across countries, influencing capital flows through differences in aggregate saving rates and labor supply. I build a general equilibrium model featuring overlapping generations and international trade where dynamics are driven by capital accumulation and borrowing and lending. The equilibrium can be replicated by a model in which every country is inhabited by a representative household that experiences an endogenous, time-varying discount factor reflecting the co-evolution of the entire age distribution and relevant prices. This equivalence affords computation of the exact transitional dynamics. I calibrate the model to match national accounts and bilateral trade data and quantify how demographic forces affected capital flows between 28 countries since 1970. On average, increasing a country's mean age by one year boosts its current account by 0.4 percent of GDP. Observed bilateral trade patterns dictate the cross-country dispersion and magnitude of capital flows in response to changes in any individual country's demographics.