The Effect of Alternative World Fertility Scenarios on the World Interest Rate, Net International Capital Flows and Living Standards

This paper applies a multi-region Ramsey model to the question of the impact of alternative fertility scenarios on the world interest rate, net international capital flows and living standards. The world economy is divided into nine regions consisting of the eight regions in the United Nations long run demographic projections (1998 Revision) plus Japan as a separate region. Age-specific consumption demands and age-specific labour productivity levels are applied. The model is simulated for the low, medium and high fertility scenarios as projected for all regions by the United Nations. Population ageing in five of the nine regions – Japan, Europe, North America, China and Oceania- over the next few decades causes a fall in the world interest rate, which is greater the lower the fertility scenario. The size of net international capital flows is smaller for the low fertility scenario and higher for the high fertility scenario. This is due to the different effect on optimal saving of a change in the world interest rate for borrowing and lending regions. For lending regions the income effect is positive but for borrowing regions it is negative. This causes lending regions to reduce their lending, and borrowing regions to reduce their borrowing, in response to lower fertility; th