Asymmetric demographic shocks and institutions: The impact on international capital flows and welfare

Arezki, Rabah (2010): Asymmetric demographic shocks and institutions: The impact on international capital flows and welfare.

Abstract

This paper examines the consequences of an asymmetric negative fertility shock on capital formation, saving/investment imbalance, and welfare. The framework of analysis is a Diamond-type overlapping-generations small open economy with capital market imperfection. The capital market imperfection is modelled through a symmetric wedge between foreign investor and domestic investor return on capital. The shock is transmitted to the small open economy depending on whether the wedge is below a given threshold. If the wedge is not too high, capital first flows in the small open economy to exploit the di¤erence in returns on capital. After the shock has occurred, capital is repatriated in order to �nance the old age consumption of rest of the world investors. If capital flows internationally, lifetime utility in the small open economy decreases unambiguously for individuals born one period before the shock occurs. Provided that the small open economy is initially below its golden rule, individuals born after the time the shock has occurred experience an increase in their lifetime utility.

• Item Type: MPRA Paper
• Language: English
• Keywords: population aging; capital market imperfection; open economy; capital flows; welfare
• Subjects: H - Public Economics > H5 - National Government Expenditures and Related Policies > H55 - Social Security and Public Pensions; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; J - Labor and Demographic Economics > J1 - Demographic Economics > J10 - General; F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements

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