Where to Save Matters: Impact of Aging-induced Saving on Structural Change and Growth

Abstract

We describe a new channel through which savings patterns in an aging population lead to structural transformation and affect long-term economic growth. We show that accumulation of physical capital and foreign assets during population aging shifts the relative demand between tradable and non-tradable goods, depending on public policies restricting household investments into specific asset categories. In the presence of productivity growth externality in the tradable sector and capital control policies, the structural change is biased toward tradable sectors, thus enhancing aggregate productivity. Using a calibrated life-cycle model that accurately represents China in its current demographic transition, we evaluate how internal and external financial liberalization affects asset accumulation created by savings of the aging population. We show that internal financial liberalization can enhance productivity and output at the cost of lower welfare, while external liberalization does the opposite.

Keywords: Demographic transition, structural transformation, output growth, financial liberalization policies

JEL Classification: E21, F41, F43, O41