Bi-Demographic Changes and Current Account using SVAR Modeling: Evidence from Saudi Arabia

Ghassan, Hassan and Alhajhoj, Hassan R. and Balli, Faruk (2018): Bi-Demographic Changes and Current Account using SVAR Modeling: Evidence from Saudi Arabia.

Abstract

The paper aims to explore the impacts of bi-demographic structure on the current account and growth. Using a SVAR modeling, we track the dynamic impacts between these underlying variables. New insights have been developed about the dynamic interrelation between population growth, current account and economic growth. The long-run net impact on economic growth of the domestic working population growth and demand labor for emigrants is positive, due to the predominant contribution of skilled emigrant workers. Besides, the positive long-run contribution of emigrant workers to the current account growth largely compensates the negative contribution from the native population, because of the predominance of skilled compared to unskilled workforce. We find that a positive shock in demand labor for emigrant workers leads to an increasing effect on native active age ratio. Thus, the emigrants appear to be more complements than substitutes for native workers.

• Item Type: MPRA Paper
• Language: English
• Keywords: Hybrid population, Current account, Growth, Structural modeling, Saudi Arabia
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; F - International Economics > F2 - International Factor Movements and International Business > F22 - International Migration; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; J - Labor and Demographic Economics > J1 - Demographic Economics > J15 - Economics of Minorities, Races, Indigenous Peoples, and Immigrants ; Non-labor Discrimination; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J23 - Labor Demand

References

1. Ando AK. and Modigliani F. (1963) The life-cycle hypothesis of saving: Aggregate implications and tests. American Economic Review 53:55-84.

2. Amisano G. and Giannini C. (1997) Topics in Structural VAR Econometrics. 2nd Edition, Springer-Verlag, Berlin.

3. Amuedo-Dorantes C. (2014) The good and the bad in remittance flows. IZA World of Labor 97:1-10. http://wol.iza.org/articles

4. Andrews DWK. (1991) Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation. Econometrica 59:817-858.

5. Asharaf AS., Mouselhy MA. (2013) Ageing in Saudi Arabia: Impact of Demographic Transition. Bold: Quarterly Journal of the International Institute on Ageing 24(1):13-27.

6. Barro R. (1991) Economic Growth in a Cross Section of Countries. Quarterly Journal of Economics 106(2):407-443.

7. Bjorvatn K., Farzanegan MR. (2013) Demographic Transition in Resource Rich Countries: A Blessing or a Curse? World Development 45:337-351.

8. Boubtane E., Coulibaly D., Rault Ch. (2013) Immigration, Growth, and Unemployment: Panel VAR Evidence from OECD Countries. Labour 27(4):399–420.

9. Bonham C., Wiemer C. (2013) Chinese savings dynamics: the impact of GDP growth and the dependent share. Oxford Economic Papers 65:173-196. Demographic Research 29(23):617-640.

10. Breitung J., R. Brüggemann, H. Lütkepohl (2004). Structural Vector Autoregressive modeling. Chapter 4 In H. Lütkepohl and M. Kratzig (Eds.), Applied Time Series Econometrics. Cambridge University Press.

11. Brooks R. (2000) Population Aging and Global Capital Flows in a Parallel Universe. IMF Working Paper 151, International Monetary Fund.

12. Brown MB., Forsythe AB. (1974) Robust Tests for the Equality of Variances. Journal of the American Statistical Association 69(346):364-367.

13. Castles S., Miller MJ. (2009) The Age of Migration. Fourth Edition: International Population Movements in the Modern World. Fourth Edition, Basingstoke: Palgrave MacMillan.

14. Cooper RN. (2008) Global Imbalances: Globalization, Demography, and Sustainability. Journal of Economic Perspective 22(3):93-112.

15. D’Albis H., Collard F. (2013) Age Groups and the Measure of Population Aging. Demographic Research 29(23):617-640.

16. Deaton AS., Paxson CH. (1997) The Effects of Economic and Population Growth on National Saving and Inequality. Demography 34(1):97-114.

17. Docquier F., Rapoport H., Salomone S. (2012) Remittances, Migrants' Education and Immigration Policy: Theory and Evidence from Bilateral Data. Regional Science and Urban Economics 42(5):817-828.

18. Dolado J., Goria A., Ichino A. (1994) Immigration, human capital and growth in the host country: evidence from pooled country Data. Journal of Population Economics 7(2):193-215.

19. Dustmann C., Fabbri F., Preston I. (2005) The Impact of Immigration on the British Labour Market. The Economic Journal 115:324-341.

20. Dynan EK., Edelberg W., Palumbo MG. (2009) The Effects of Population Aging on the Relationship between Aggregate Consumption, Saving, and Income. American Economic Review 99(2):380-386.

21. Enders W., (2004). Applied econometric time series. New York: John Wiley & Sons.

22. Engle RF. and Granger CWJ. (Eds.) (1991) Long Run Economic Relations: Readings in Cointegration. Oxford University Press.

23. Engle RF., Granger CWJ. (1987) Co-Integration and Error Correction: Representation, Estimation and Testing. Econometrica 55:251-276.

24. Fair RC., Dominguez KM. (1991). Effects of the Changing U.S. Age Distribution on Macroeconomic Equations. American Economic Review 81:1276-1294.

25. Feroli M. (2006) Demography and the U.S. Current Account Deficit. The North American Journal of Economics and Finance 17(1):1-16.

26. Fry MJ., Mason A. (1982) The Variable Rate-of-Growth Effect in the Life-Cycle Saving Model: Children, Capital Inflows, Interest and Growth in a New Specification of the Life-Cycle Model Applied to Seven Asian Developing Countries. Economic Inquiry 20(3):426-442.

27. Fukumoto Y., Kinugasa T. (2017) Age Structure and Trade Openness: An Empirical Investigation. The World Economy 40(6):1247-1263.

28. Gomez V., A. Maravall. (1996). Programs TRAMO and SEATS, Instruction for User (Beta Version). Bank of Spain. Working Paper 9628.

29. Ghassan BH., Hajhoj RH., Kbiri AM. (2013) The impacts of International Financial Crisis on Saudi Arabia Economy: Evidence from Asymmetric SVAR modelling. Journal of Reviews on Global Economics 2:390-406.

30. Graff M., Tang KK., Zhang J. (2012) Does Demographic Change Affect the Current Account? a reconsideration. Global Economy Journal 12(4):1-26.

31. Greene WH. (2012) Econometric Analysis. 7th International Edition, Pearson Education Limited.

32. Grossman JB. (1982) The Substitutability of Natives and Immigrants in Production. Review of Economics and Statistics 64:596-603.

33. Gudmundsson GS., Zoega G. (2014) Age structure and the Current Account. Economics Letters 123(2):183–186.

34. Hansen BE. (1992) Tests for Parameter Instability in Regressions with I(1) Processes. Journal of Business and Economic Statistics 10:321-335.

35. Hansen BE. (1990) A Powerful, Simple Test for Cointegration Using Cochrane-Orcutt. Rochester Center for Economic Research, Working Paper #230:1-36.

36. Hassan AFM., Salim R., Bloch H. (2011) Population Age Structure, Saving, Capital Flows and the Real Exchange Rate: A Survey of the Literature. Journal of Economic Survey 25(4):708-736.

37. Hathroubi S., Aloui C. (2016) On Interactions between Remittance Outflows and Saudi Arabian Marcoeconomy: New evidence from wavelets. Economic Modelling 59:32–45.

38. Higgins M. (1998) Demography, National Savings and International Capital Flows. Economic Review 39(2):343-369.

39. Hobijn B., Franses PH., Ooms M. (2004) Generalizations of the KPSS-Test for Stationarity. Statistica Neerlandica 58:483-502.

40. Juselius K., (2006). The cointegrated VAR model: Methodology and Applications. Oxford University Press: Oxford.

41. Karras G. (2009) Demographic Change and the Current Account: Theory and Empirical Evidence. Journal of Economic Asymmetries 6(1):1-14.

42. Kiefer NM., Vogelsang TJ. (2005) A New Asymptotic Theory for Heteroskedasticity-Autocorrelation Robust Tests. Econometric Theory 21(06):1130-1164.

43. Kim JH. (2014), Testing for parameter restrictions in a stationary VAR model: A bootstrap alternative. Economic Modelling 41:267-273.

44. Kim S., Lee JW. (2008) Demographic changes, saving, and current account: an analysis based on a panel VAR. Japan and the World Economy 20(2):236-256.

45. Kim S., Lee JW. (2007) Demographic Changes, Saving, and Current Account in East Asia. Asian Economic Papers 6(2):22-53.

46. Kwiatkowski D., Phillips P., Schmidt P., Shin Y. (1992) Testing the Null Hypothesis of Stationarity against the Alternative of a Unit Root. Journal of Econometrics 54:159-178.

47. Leff N. (1969) Dependency Rates and Savings Rates. American Economic Review 59: 886-896.

48. Li H., Zhang J., Zhang J. (2007) Effects of Longevity and Dependency Rates on Saving and Growth: Evidence from a Panel of Cross Countries. Journal of Development Economics 84(1): 138-154.

49. Lucchetti R. (2006) Identification of Covariance Structures. Econometric Theory 22(2):235-257.

50. Lütkepohl H. (2007). New Introduction to Multiple Time Series Analysis. Second Edition, Springer.

51. Marchiori L. (2011) Demographic Trends and International Capital Flows in an Integrated World. Economic Modelling 28(5):2100-2120.

52. Mason A. (1988) Saving, Economic Growth and Demographic Change. Population and Development Review 14:113-144.

53. McKinsey Global Institute, MGI. (2015) Saudi Arabia Beyond Oil: Investment and Productivity Transformation. Employment and Growth Report, December.

54. Modigliani F., Ando AK. (1957) Test of the Life-Cycle Hypothesis of Saving Common and Suggestions. Bulletin of the Oxford University Institute of Statistics 19:99-124.

55. Modigliani F. (1966) The Life-Cycle Hypothesis of Saving the Demand for Wealth and the Supply of Capital. Social Research 33:160-217.

56. Naufal G., Genc I. (2012) Remittance Outflows. In: Expats and the Labor Force. The Economics of the Middle East. Pages 77-95. Palgrave Macmillan, New York.

57. Newey WK., West KD. (1994) Automatic Lag Selection in Covariance Matrix Estimation. Review of Economic Studies 61:631-653.

58. Nielson HB., (2004). Cointegration analysis in the presence of outliers. Econometrics Journal 7:249-271.

59. Ogaki M. (1993) Unit Roots in Macroeconometrics: A Survey. Monetary and Economic Studies 11:131-154.

60. Ortega F., Peri G. (2009) The Causes and Effects of International Migrations: Evidence from OECD Countries 1980-2005. NBER Working Paper No. 14833.

61. Park JY. (1992) Canonical Cointegrating Regressions. Econometrica 60:119-143.

62. Park JY. (1990) Testing for Unit Roots and Cointegration by Variable Addition. Advances in econometrics 8(2):107-133.

63. Peri G. (2016) Immigrants, Productivity, and Labor Markets. Journal of Economic Perspectives 30(4):3–30.

64. Peterson EWF. (2017) The Role of Population in Economic Growth. Sage Open Journal, October-December:1-15.

65. Phillips PCB., Ouliaris S. (1990) Asymptotic Properties of Residual Based Tests for Cointegration. Econometrica 58:165-193.

66. Prskawetz A., Kogel T., Sanderson WC., Scherbov S. (2004) The Effects of Age Structure on Economic Growth: An Application of Probabilistic Forecasting to India. Working Paper 03, Vienna Institute of Demography.

67. Simon C., Belyakov AO., Feichtinger G. (2012) Minimizing the Dependency Ratio in a Population with below Replacement Fertility through Immigration. Theoretical Population Biology 82(3):158-169.

68. Stark O. (1991) The Migration of Labor. Blackwell Books, Wiley Blackwell, number 1557860300, January.

69. Stock JH., Watson MW. (2001) Vector Auto-regressions. Journal of Economic Perspectives 15(4):101-115.

70. Stock JH., Watson MW. (1996) Evidence on Structural Instability in Macroeconomic Time Series Relations. Journal of Business and Economic Statistics 14(1):11–30.

71. Taylor AM. (1995) Debt, Dependence, and the Demographic Transition: Latin America into the Next Century. World Development 23(5):869-879.

72. Taylor AM., Williamson J. (1994) Capital Flows to the New World as an Intergenerational Transfer. Journal of Political Economy 102(2):348-371.

73. Vargas-Silva C., Huang P. (2006) Macroeconomic determinants of workers' remittances: host versus home country's economic conditions. Journal of International Trade and Economic Development 15:81–99.

74. World Bank Group (2016) Migration and Remittances, Fact Book 2016. Third Edition. www.knomad.org

75. Zaman A. (1996) Statistical Foundations for Econometric Techniques. Emerald Group Publishing Limited, Academic Press.

76. Zheng Ch. (2007) An Empirical Study of the Relationship between Population Structure and Savings Ratio in Different Regions. Population and Economy 14(6):1-5.