Demography, credit and institutions: A global perspective

Arezki, Arezki (2010): Demography, credit and institutions: A global perspective.

Abstract

This paper examines the role of age structure and its interaction with various capital market imperfections in driving international capital �ows in an empirical framework. Using panel data covering the period 1970 to 2000 for up to 115 countries, results indicate the existence of a di¤erentiated e¤ect in the relationship between age structure and international capital flows. Good institutions allow for a differentiated impact of age structure on saving and investment, opening the scope for an impact of age structure in driving international capital flows. In contrast, bad institutions result in no e¤ect of age structure on international capital flows. Despite increased credit availability contributing to reduced aggregate saving, this will nevertheless magnify the role of the population age structure in driving international capital flows. Over the past three decades, age structure changes are estimated to have contributed to improve the current account position by five percent of GDP in more advanced aging countries. However, around the year 2020, population age structure changes are projected to deteriorate the current account position in the latter countries which will experience a drop in saving. In other regions, the faster the current aging process, the sharper the projected improvement in the current account position. This improvement is projected to reverse itself, at a later stage in time in regions with a slower aging process. Also, our results suggest that in order to take advantage of their younger population in the form of increased foreign capital in�ows, countries that are less advanced in the demographic transition would need to improve the quality of their institutional arrangements before the "window of opportunity" closes.

• Item Type: MPRA Paper
• Language: English
• Keywords: F2; F4
• Subjects: F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance; F - International Economics > F2 - International Factor Movements and International Business

References

Alfaro, Laura, Sebnem Kalemli-Ozcan, and Vadym Volosovych, "Why Doesn�t Capital Flow from Rich to Poor Countries? An Empirical Investigation," Working Papers 2003-01, Department of Economics, University of Houston, 2003.

Arezki, Rabah, "Asymmetric Demographic Shocks and Institutions: The Impact on International Capital Flows and Welfare," International Monetary Fund, mimeo, 2010.

Attanasio, Orazio, and Violante G., �The Demographic Transition in Closed and Open Economies: A Tale of Two Regions,�Inter-American Development Bank, Research Department, Working Paper No. 412, 2000.

Bosworth, B., and Keys B., "Increased Life Expectancy: A Global Perspective," in Coping With Methuselah, Henry Aaron and William Schwartz, ed. (Washington D.C.: Brookings, 2003).

Brooks, Robin, �Population Aging and Global Capital Flows in a Parallel Universe,�IMF Working Paper 00/151, 2002.

Brumberg, R., and F. Modigliani, "Utility Analysis and Aggregate Consumption Functions: An Attempt at Integration," in Collected Papers of Franco Modigliani, A. Abel ed., (Cambridge: MIT Press, Vol. 2, 1979).

Cutler, David, M., James M. Poterba, Louise M. Sheiner and Lawrence H. Summers,"An Aging Society: Opportunity or Challenge?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1990-1), pages 1-74.

Fair, R., and Dominguez K., "E¤ects of the Changing U.S. Age Distribution on Macroeconomic Equations," American Economic Review 81 (1991), 1276-1294.

Gourinchas, Pierre Olivier, and Olivier Jeanne, "The Elusive Gains from International Financial Integration," NBER Working Paper 9684, 2003.

Higgins, Matthew, "Demography, National Savings, and International Capital Flows," International Economic Review, Vol. 39, No. 2 (1998), pp. 343-69.

International Monetary Fund (2004), Annual Report on Exchange Arrangements and Exchange Restrictions.

Japelli, T., and Pagano M., "Saving, Growth, and Liquidity Constraints," Quarterly Journal of Economics 109 (1995), 83-109.

Lucas, Robert E., "Why Doesn�t Capital Flow from Rich to Poor Countries?" American Economic Review 80 (1990), 92-96. [14] Modigliani, F., and Brumberg R., "Utility Analysis and Consumption Function: an Interpretation of the Cross-Section Data", in Post-Keynesian Economics, K. Kuri- harea ed., (New Brunswick: Rutgers University Press, 1954).

The Political Risk Services Group, International Country Risk Guide. The PRS Group, New York, 2004.

Prasad E., Rogo¤ K., Wei S-J and Kose A, "E¤ects of Financial Globalization on Developing Countries: Some Empirical Evidence," Global Financial Stability Report, International Monetary Fund, March 17, 2003.

Shleifer, Andrei, and Wolfenzon, Daniel., "Investor Protection and Equity Markets," Journal of Financial Economics, 66(1) (October 2002), pp. 3-27.

United Nations, World Population Prospects: The 2002 Revision, Population Division, Department of Economic and Social A¤airs, (New York: United Nations, 2004).

World Bank, World Development Indicators, CD-ROM, (Washington D.C.: The World Bank, 2004).