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Higgins, M. “Demography, National Savings and International Capital Flows.” International Economic Review, Vol. 39 No. 2 (1998): 343–369
Juillard, M. and and the INGENUE Team. “INGENUE, A Multi-Region Computable General Equilibrium Overlapping-Generations Model.” Mimeo, July 2000
Special thanks are due to Richard Hemming for the main idea behind this paper, to examine the global dimension of population aging using a model of large open economies, and for continued encouragement. I am grateful to Orazio Attanasio, Tam Bayoumi, Luis Cubeddu, Richard Disney, Hamid Faruqee, Peter Isard, Michel Juillard, Douglas Laxton, Eswar Prasad and Steve Symansky for many helpful discussions. Any errors are mine.
Adding uncertainty to the model would allow capital in emerging markets to be riskier than in developed economies. Such an extension would generate risk premia such that the risk-adjusted returns across regions would be equalized. Greater risk in emerging markets could reflect technological, political or institutional factors. Lucas (1991) argues that adjusting for lower levels of education in the developing world would reduce the scale of international capital flows. In the context of the model this would involve scaling down the effective labor supply in developing regions, thereby bringing capital-labor ratios in emerging markets up towards those in developed economies.
Life expectancy in the model used here is exogenous, since all agents live for four periods regardless of when they are born. Higgins and Williamson (1996) argue that changes in fertility, and resulting changes in youth dependency, are responsible for large swings in savings, investment, and foreign capital dependence in Asia during the post-war period. There is certainly more cross-sectional variation in youth than old-age dependency rates, so that this deficiency of the model is perhaps second-order.
This paper incorporates the effects of youth dependency by allowing consumption of children to enter parents’ utility. Both papers treat fertility as exogenous.
These parameter choices are consistent with the recent overlapping generations literature. Higgins (1994) chooses ϕ=0.33, β=0.54, δ=0.72, and θ=0.77 in the context of a 3 period model. For this choice of θ the elasticity of intertemporal substitution is 1.3, so that higher interest rates lead to a moderate increase in saving. Higgins and Williamson (1996) appear to have the same parameterization, with the exception of θ, which is set at 1, making savings unresponsive to changes in the interest rate. Attanasio and Violante (2000), in a model with mortality risk, set ϕ=0.36, β=1.011 per annum, δ=0.05 per annum, with θ=2 such that higher interest rates reduce savings slightly.
The data from Maddison (1995) give GDP per capita in 1985 US dollars and the total population for a range of countries starting in 1870. This data is reproduced in Barro and Sala-i-Martin (1995). For the AFR and FSU economies the POP series, which is population in thousands, and the RGDPCH series, which is GDP per capita in constant dollars, were used from the Penn World Tables Mark 5.6 to construct the ratios.
For the period 1950 to 1990 the data are taken from the United Nations “World Population Prospects: The 1992 Revision,” which provides data on the age distribution (in 5 year age-groups) for a large cross-section of countries. The demographic data from 1995 onward are imputed using country-specific cohort growth rates (for the same 5 year age-groups) from the World Bank “World Population Projections: The 1994-95 Edition,” using the United Nations data as a base. This data splice is necessary because the United Nations projections extend only to 2025, while the World Bank data go back only to 1990. In 1990, the base year for the projections used in this paper, the age distribution data from both sources are very similar in most cases.
Cohort growth rates for the model are computed by aggregating the16 5-year age groups in the data into 4 20-year age groups that span 0-19, 20-39, 40-59, 60+. The cohort growth rate is then the “child” cohort divided by the “young worker” cohort minus one, calculated in 20 year intervals.
Under the assumption of perfect capital mobility cohort growth must be equal across regions in the steady state. The level of cohort growth in the pre-transition steady state is important because it will impact the extent to which the transition will produce capital deepening. The simulated transition will produce substantial capital deepening as cohort growth declines from initially 3 percent per year to zero. A second transition scenario that begins in 1950 and starts from an initial steady state with cohort growth around 1 percent per annum produces less capital deepening but qualitatively unchanged transitional dynamics beyond 1990.
Using equation (16) is possible to find the steady state capital-labor ratio for a given cohort growth rate. Using csolve.m, a non-linear equation solver for Matlab written by Christopher Sims, this is done for the pre- and post-transition steady states. These capital-labor ratios are then imposed as initial and terminal conditions in a system of non-linear difference equations, based on equation (15) that must hold over the transition. The equilibrium path of the capital-labor ratio consistent with this system of equations is then solved for numerically using csolve.m.
The current account balance is derived as the difference between net saving and net investment. Net saving in period t is given by At – At-1 where
Going from 2010 to 2030, the turning point in the global savings – investment balance obtains for a wide range of conventional parameterizations of the model. It is however highly sensitive to different scenarios for economic growth in developing regions. A scenario where GDP per capita in CHI converges with that in NA beginning in the period centered around 2010, for example, would raise the incipient return on capital in CHI and generate capital inflows. The timing and scale of these inflows would depend on projected economic growth in CHI relative to the rest of the world.
The capital deepening effects over the very long run are conditional on the World Bank forecast, which sees cohort growth in the very long run decline to zero.
The current account and GDP series are taken from the World Economic Outlook. The regional series have different lengths, because data for developing countries becomes available later than for industrial ones. For Africa the series begins in 1970, for China in 1968, for the EU and FSU countries in 1969 (this WEO category includes some Eastern European countries), for Japan in 1966, for LAC in 1968, for North America in 1961, and for the ROW region in 1980.