Working Paper: NBER ID: w19465
Authors: David Backus; Thomas Cooley; Espen Henriksen
Abstract: We consider the causes of international capital flows. Since capital flows are extremely persistent, we argue that their drivers must be persistent, too. We think the most compelling candidates are demographic trends, tfp differences and financial frictions. In this paper we focus primarily on the role of demography in a multi-country overlapping generations model in which saving decisions are tied to agents' life expectancy. Capital flows reflect differences between saving and investment across countries. Demographic changes affect the aggregate accumulation of assets in two ways: by changing life expectancy which changes individual household saving behavior, and by changing the age distribution of the population by which individual household decisions are aggregated. The most important drivers turn out to be increases in life expectancy caused by decreases in adult mortality.We use a quantitative version of the model to illustrate the impact of demography on capital flows and net foreign assets in China, Germany, Japan, and the United States.
Keywords: demography; capital flows; life expectancy; savings; investment
JEL Codes: J11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increases in life expectancy (I14) | changes in individual household saving behavior (D14) |
| changes in individual household saving behavior (D14) | capital flows (F32) |
| increases in life expectancy (I14) | capital flows (F32) |
| demographic changes (J11) | net foreign asset positions (F32) |
| persistent demographic trends (J11) | long-term patterns in capital flows (F32) |