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Global Demographic Change and International Capital Flows: Theory and Empirics

CEPAR Cross Nodal Seminar Series

Speaker: Weifeng (Larry) Liu

Topic: Global Demographic Change and International Capital Flows: Theory and Empirics

Abstract: This paper provides a review of the studies on the impacts of global demographic change on international capital flows. While the population has been aging globally, countries are asymmetric in the timing and speed of the demographic transitions, especially between developed and developing regions. This asymmetry has important implications on international capital flows and current account balances. Particularly, the global demographic change has been linked to the global current account imbalances in the last several decades. This paper first presents a theoretical model to illustrate the demographic effects on international capital flows, and then reviews the modeling and empirical studies respectively. There are several qualitative implications. First, the patterns of capital flows depend on the nature of demographic shocks (permanent or transitory; fertility or mortality) and also on the stage of demographic shocks because foreign assets accumulated early in life would be decummulated later for retirement. Second, poor pension systems tend to increase national saving and drive capital outflows. Third, financial frictions such as borrowing constraints of young people also tend to increase national saving and drive capital outflows. Fourth, production and trade specialization in labor-intensive sectors tend to decrease investment and drive capital outflows. Fifth, the magnitude of the demographic effects also depends on the extent of cross-border mobility of capital, labor and goods. There are also several quantitative implications. First, demographics alone can explain a significant fraction of historical current account dynamics among advanced economies, especially low-frequency movements. Second, institutional and financial frictions need to be incorporated to reconcile the demographic effects with historical capital flows from emerging to advanced economies. Third, production structure and trade specialization also play an important role in the demographics-driven capital outflows from emerging economies.

Weifeng (Larry) Liu is a Research Fellow at the Centre of Applied Macroeconomic Analysis (CAMA) in the Crawford School of Public Policy of the Australian National University (ANU) and the ARC Centre of Excellence in Population Ageing Research (CEPAR). He completed his PhD in Economics at ANU and joined CEPAR in 2018. His current research focuses on the international aspects of global demographic change.