Demographics and the Real Exchange Rate

74 Pages Posted: 24 May 2019 Last revised: 31 Jan 2020

See all articles by Marta Giagheddu

Marta Giagheddu

Johns Hopkins University SAIS

Andrea Papetti

Bank of Italy

Date Written: January 30, 2020

Abstract

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

Suggested Citation

Giagheddu, Marta and Papetti, Andrea, Demographics and the Real Exchange Rate (January 30, 2020). Available at SSRN: https://ssrn.com/abstract=3358551 or http://dx.doi.org/10.2139/ssrn.3358551

Marta Giagheddu (Contact Author)

Johns Hopkins University SAIS ( email )

1717 Massachusetts Avenue NW
Washington DC, DC 20036
United States

Andrea Papetti

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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