Demography and Low Frequency Capital Flows

40 Pages Posted: 28 Sep 2013

See all articles by David K. Backus

David K. Backus

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Thomas F. Cooley

New York University - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Espen Henriksen

Department of Financial Economics, BI Norwegian Business School

Date Written: September 2013

Abstract

We consider the causes of international capital flows. Since capital flows are extremely persistent, we argue that their drivers must be persistent, too. We think the most compelling candidates are demographic trends, tfp differences and financial frictions. In this paper we focus primarily on the role of demography in a multi-country overlapping generations model in which saving decisions are tied to agents' life expectancy. Capital flows reflect differences between saving and investment across countries. Demographic changes affect the aggregate accumulation of assets in two ways: by changing life expectancy which changes individual household saving behavior, and by changing the age distribution of the population by which individual household decisions are aggregated. The most important drivers turn out to be increases in life expectancy caused by decreases in adult mortality.We use a quantitative version of the model to illustrate the impact of demography on capital flows and net foreign assets in China, Germany, Japan, and the United States.

Suggested Citation

Backus, David K. and Cooley, Thomas F. and Henriksen, Espen, Demography and Low Frequency Capital Flows (September 2013). NBER Working Paper No. w19465. Available at SSRN: https://ssrn.com/abstract=2332517

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Thomas F. Cooley

New York University - Leonard N. Stern School of Business ( email )

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Espen Henriksen

Department of Financial Economics, BI Norwegian Business School ( email )

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Norway

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