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Demographic transition and economic growth in 6-EU member states

Srdelic, Leonarda and Davila-Fernandez, Marwil J. (2022): Demographic transition and economic growth in 6-EU member states.

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Abstract

Europe is experiencing a dramatic shift in its demographic structure, ending three centuries of unprecedented population growth. However, there are few empirical estimates of the realised effect of such a process on economic performance. The present article attempts to fill this gap in the literature by assessing the impact of demographic transition in six European countries between 1971 and 2019. Unlike most studies in the field that rely on Cobb-Douglas production functions, we adopt an open-economy approach under the premise that, in the long-run, growth is balance-of-payments constrained. Applying time-varying-parameter estimation techniques, we compute the rate of growth compatible with equilibrium in the balance-of-payments (yBP) and show it is a good predictor of output growth trends. We proceed by investigating the importance of population dynamics as one of its determinants. The obtained effects are moderate, and there is significant heterogeneity between countries. In Italy, for instance, a 10-points increase in the old-age dependency ratio is associated with a 3% lower yBP, while in France, we have the opposite effect. Moreover, population decline effects are conditional to controlling for migration, with Germany and Austria differentiating themselves from their Southern Europe counterparts.

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