Demographics and the Real Exchange Rate
74 Pages Posted: 24 May 2019 Last revised: 31 Jan 2020
Date Written: January 30, 2020
We develop a two-country, two-sector overlapping generations model to examine the effect of population aging on the real exchange rate (RER). While an older population raises the relative demand for nontradables (a feature of structural transformation) putting upward pressure on relative prices thus appreciating the RER, it also implies a lower real interest rate (distinctive of secular stagnation) that dampens the elderly nontradables consumption and thus mitigates the RER appreciation. We quantify a general equilibrium effect of 0.1% RER appreciation following a rise by 1% in the relative old dependency ratio in line with our empirical estimates.
Keywords: population aging, real exchange rates, life-cycle saving, consumption composition
JEL Classification: F31, F41, J11
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