The global macroeconomic consequences of a demographic transition
Download
1 / 40

The Global Macroeconomic Consequences of a Demographic Transition - PowerPoint PPT Presentation


  • 175 Views
  • Uploaded on

The Global Macroeconomic Consequences of a Demographic Transition. Warwick J McKibbin Centre for Applied Macroeconomic Analysis, RSPAS, ANU; Lowy Institute for International Policy, Sydney The Brookings Institution, Washington DC;.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'The Global Macroeconomic Consequences of a Demographic Transition' - leigh


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
The global macroeconomic consequences of a demographic transition

The Global Macroeconomic Consequences of a Demographic Transition

Warwick J McKibbin

Centre for Applied Macroeconomic Analysis, RSPAS, ANU;

Lowy Institute for International Policy, Sydney

The Brookings Institution, Washington DC;

Prepared for a seminar at the Harvard Program on the Global Demography of Aging. Cambridge Mass Thursday, February 23


Overview
Overview Transition

  • Summary of Global Demographic trends

  • Macroeconomic issues

  • Alternative approaches

  • Consequence of global demographic change in 10 regions from 2004 to 2050

  • Conclusions


Main macroeconomic impacts
Main Macroeconomic Impacts Transition

  • Aggregate saving, consumption, wealth

    • Composition of consumption bundles

  • Investment rates

    • aggregate

    • across sectors

  • Labor markets

  • Government budgets

  • => General equilibrium impacts on trade and financial flows and asset prices including real exchange rates


  • Macroeconomic impacts
    Macroeconomic Impacts Transition

    • What happens to the current account on any country depends on the impact on savings relative to investment

      • A rise in savings relative to investment will tend to improve the current account

      • A fall in savings larger than a fall in investment will tend to worsen the current account


    Alternative approaches
    Alternative Approaches Transition

    • Cross sectional/time series econometric estimation of aggregate saving and investment and growth equations or current accounts

    • Higgins (1998), Masson et al (1998), Helliwell (2004), IMF (2004)

    • Tend to find negative impact of dependency rates on investment, savings and the current account


    Alternative approaches1
    Alternative Approaches Transition

    • Vector Autoregression models with demographic and economic variables (Kim and Lee (2005)

    • Strong negative impact of dependency rates on saving

    • Strong negative impact of dependency rates on current account


    Alternative approaches2
    Alternative Approaches Transition

    • Calibrated OLG models of single economies and multiple economies

      • Brooks (2005), Ingenue (2004)

    • Calibrated CGE models of global economy

      • Tyers (2005) using GTAP


    Alternative approaches3
    Alternative Approaches Transition

    • Calibrated/estimated DIGE/DSGE models

      Bryant/Faraque/Laxton

      McKibbin/Nguyen/Callen/Battini


    Theoretical approach
    Theoretical Approach Transition

    • Follows Yaari/Blanchard/Weil models as extended by Faruqee, Laxton, Bryant, McKibbin and others

    • Demographics from the “bottom up”

      • Approximate an OLG model using a probability of death and exogenous profiles of birth and death rates to generate cohort adjustment over time

      • The demographic change is taken as exogenous and cohort aggregation effects are calculated outside the core model


    Minimum requirements
    Minimum Requirements Transition

    • Adults are distinguished from children so we can capture the importance of changes in the youth dependency ratio

    • Country specific models for the major countries/regions so we can capture the asymmetries


    Children
    Children Transition

    • Are born to adults and stay children for 16 years

    • Do not supply labour

    • Do not hold financial wealth

    • Receive transfers from adults (which grow at the rate of economy wide productivity growth) which they consume

    • Have a different birth rate (defined as the number of children as a percent of the adult population) than the adult maturity rate (defined as the number of new adults as a percent of the adult population)

    • Have a different mortality rate than adults


    Adults workers
    Adults/workers Transition

    • Emerge at age 17 from the pool of children

    • The adult maturity rate is the rate of emergence of adults as a percent of the total adult population

    • Are born with the productivity of the cohort alive in time t and then acquire productivity based on the estimate age earnings profiles over time.

    • Die at a constant rate over time (major shortcoming but needed for aggregation).


    Introduce empirical age earnings profiles
    Introduce empirical age earnings profiles Transition

    • Labor income

      • rises with age and experience

      • reaches a peak in late middle age

      • then declines gradually for the rest of life

    • The shape of the age-earnings profile for individuals in the economy is assumed to be the same for all individuals and unchanged through time.


    Introduce empirical age earnings profiles1
    Introduce empirical age earnings profiles Transition

    • But the demographic composition of the population can change over time.

    • Because aggregate labor income is obtained by aggregating over individuals that differ in age and experience, moreover, the bottom-up aggregation over individuals permits the demographic changes to influence both the aggregate level and the age distribution of labor income.


    Introduce empirical age earnings profiles2
    Introduce empirical age earnings profiles Transition

    • The hump-shaped profile of earnings by age influences both the supply side and the demand side of the model economy's behavior.

    • Hence through these life-cycle effects, changes in demographics significantly influence macroeconomic outcomes.


    Supply side effects
    Supply side effects Transition

    • On the supply side, the earnings profile is an indicator of the changes in a cohort's relative productivity and its supply of labor over its lifetime.

    • The marginal product of capital will change and investment will respond


    Demand side
    Demand Side Transition

    • On the demand side, the anticipated path of labor income determines the saving plans of consumers over their lifetimes.

    • Changes in investment will change the demand the goods.


    Msg cubed model countries
    MSG-Cubed Model: Countries Transition

    • Japan

    • USA

    • Western Europe

    • Rest of OECD

    • Eastern Europe and the Former Soviet Union

    • China

    • India

    • Other Asia

    • Latin America

    • Other Developing Countries


    Msg cubed model sectors
    MSG-Cubed Model: Sectors Transition

    • Energy

    • Non-Energy

    • Capital Producing sector


    Msg cubed model
    MSG-Cubed model Transition

    • Estimated dynamic intertemporal model with Keynesian short-run rigidities

      • Adjustment costs in capital accumulation

      • Financial capital mobile given risk premia

      • Wages adjust slowly given labour market rigidities

      • Financial markets for equity, bonds, money

      • Mix of optimizing and rule of thumb decision rules


    Question
    Question Transition

    • We want to estimate the overall impacts of demographic change on the global economy from 2005 onwards


    Approach
    Approach Transition

    • Develop a baseline projection of the global economy from 1985 to 2100 with a full demographic transition where countries are adjusting towards a common steady state with the same birth and death rates but from very different initial conditions


    Calculating the impact of demographic change
    Calculating the Impact of Demographic Change Transition

    • Solve the model again from 1985 to 2100 setting the birth rates of children at the steady state rates

      • The initial conditions in 1985 will already have the expectations of a demographic transition in the initial asset stocks.

      • Allow some time for the asset adjustment to occur

      • then examine the difference between the results with and without the demographic transition from 2005.







    Implications
    Implications Own versus Global Demographic Change

    • Several adjustment mechanisms possible

      • Reallocate inputs within economies

      • Raise productivity growth to generate more resources to deal with macroeconomic adjustments

    • In an open economy

      • Allow labor to flow across borders from labour abundant into labour scarce countries

      • Allow goods which embody labour to flow from labour abundant countries into labour scarce countries

      • Allow capital to flow from labour scarce countries to labour abundant countries


    Policy implications to be explored further
    Policy Implications to be explored Further Own versus Global Demographic Change

    • Open economies to international trade so that more labour can be imported into labour scarce countries embodied in goods

    • Deregulate protected sectors such as the service sector in economies such as Japan to raise productivity growth and free up scarce labour

    • Allowing greater capital mobility (and better allocation of capital) so that capital can flow to labour rather than labour flow to capital.


    Policy implications
    Policy Implications Own versus Global Demographic Change

    • Batini, Callen and McKibbin (2005) find that raising productivity growth and reducing the risk of investing in developing countries can swamp the macroeconomic impacts of demographic change


    Conclusions
    Conclusions Own versus Global Demographic Change

    • Demographic change projected over the next century has a significant impact on aggregate economic variables within countries as well as economic outcomes between countries

    • It is not sufficient to examine demographic change in a country without some allowance for what is happening in the world as a whole


    Background websites
    Background Websites Own versus Global Demographic Change

    www.sensiblepolicy.com

    www.gcubed.com


    ad