INGENUE Model ( CEPII - CEPREMAP - OFCE)

1. INGENUE Model (CEPII - CEPREMAP - OFCE) Scenarios for global ageing : An investigation with the INGENUE 2 world model Vladimir Borgy (CEPII) AGIR Conference Brussels - march 2005

2. INGENUE Model (CEPII - CEPREMAP - OFCE) Goal of the INGENUE project : To analyse quantitatively international capital flows and growth dynamics induced by differential ageing of the various regions of the world. Tool : An applied international general equilibrium model with overlapping generations of rational households

3. INGENUE Model (CEPII - CEPREMAP - OFCE) AGIR project : To analyse the macroeconomic consequences of : pensions reforms in Western Europe in this world model. Migratory scenario that we could compare with the pension reform.

4. Demographic projections point to the appearance of two groups of regions in terms of population growth rate :

5. The ageing process is not synchronous : OECD countries will be the first to experience large increase in their dependency ratio.

6. The proportion of high savers in total population follows a wave pattern that propagates from one region to the next through the decades.

7. Households : Life cycle motive for saving Rational expectations Overlapping generations voluntary bequests exogenous age-profile of labour supply lifetime uncertainty + annuity markets New demographic features : world is divided in 10 regions using our own demographic prospects The theoretical framework of the Ingenue 2 model (1) :

8. World Regions : Ingenue 2. Western EuropeEastern EuropeNorth America JapanMediterranean WorldChinese WorldAfrica Russian WorldIndian WorldSouth America

9. Firms : • 2 sectors of production in each region: • Production of a region specific intermediate • good sectors using labour and capital inputs • Production of a region specific final good • sector using foreign and domestic • intermediate goods • Assumption : existence of a fictive • world producer using region-specific • intermediate goods in order to produce • a world intermediate good. The theoretical framework of the Ingenue 2 model (2) :

10. The theoretical framework of the Ingenue 2 model (3) : Utilization of the regional final good Production of the regional final good Production of the regional final good : Production of the world good :

11. intermediate good relative  Terms of Trade price (region / world) relative price of the final good  Real (region / North America) Exchange rates wedge between World financial market but imperfect  debtors and creditors interest rates The theoretical framework of the Ingenue 2 model (4) :

12. Growth, technological diffusion and economic convergence : • The level of Total Factor Productivity is exogenous. • Before 2000, it is given by historical data. • After this date, the rate of growth of TFP is the result of : • 1. A given exogenous growth of 1.5% for the technological leader • 2. A region specific exogenous catching-up factor, reflecting international diffusion of technological progress with a specific law of diffusion :

13. In the baseline scenario, three regions are catching up at a sustained pace :Eastern Europe, Chinese and Indian World

14. baseline scenario : general slowdown in growth because the working age population growth rate diminishes in all regions but Africa.

15. baseline scenario : the world Saving-Investment equilibrium is tilted more and more toward a lower equilibrium rate.

16. baseline scenario : the downward trend profile of interest rates is due to global ageing.

17. baseline scenario : real exchange rate appreciate relatively to North America in the two regions that have an ownership ratio higher than N. America.

18. baseline scenario : improvement of N. America cur. account with the increase in saving. Decrease of cur. account surplus in W. Europe and Japan with ageing.

19. Main features of the baseline scenario for Western Europe during the first half of the 21st century : • W. Europe will be a slow growth region due to its demographic evolution and the slow progression of TFP. • W. Europe will be a net exporter of capital and the real exchange rate will appreciate. • European households will take advantage of the open economy setting through the capital income flows coming from their foreign investment (and by the gains of purchasing power they will have through imports goods).

20. Pension reforms in Western Europe: • A public PAYG system for retirement exists in each region : in the baseline scenario, starting from 2000, net replacement ratios are fixed and social contribution rates are rising with ageing. • 1. Constant contribution rates (CCR) to 2000’s level : adjustment in net replacement ratio. • 2. Postponement of retirement age (PRA) : gradual five years rise in the participation rate (from 2005 to 2025). • 3. Migratory scenario : flows of migrants into Western Europe in order to get a dependency ratio close to the one of the PRA case.

21. Pension reforms in Western Europe

22. Pension reforms in Western Europe

23. CCR : increase in saving as households need to save more, the public system being made less generousPRA : decrease in saving because of the positive effect on life cycle income.

24. CCR : temporary decrease of consumption per capitaPRA : permanent increase of consumption per capita

25. CCR : adverse demand shock leading to a (temporary) depreciation of real exchange ratePRA : depreciation of real exchange rate : the positive supply shock exceeds the positive demand shock

26. CCR : depreciation leads to an improvement of the trade balance.PRA : trade balance is temporarily below the baseline in relation with the increase of imports.

27. CCR : European households have accumulated saving and the ownership ratio is above its baseline level.PRA : ownership ratio below the baseline

28. Distributional Consequences of pensions reforms :

29. Pension reforms in Western Europe :

30. Pension reforms in Western Europe :

31. Pension reforms in Western Europe :

32. Pension reforms in Western Europe :