Population Aging and Global Capital Flows in a Parallel Universe," IMF Working Paper 00/151 (Washington: International Monetary Fund).

Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. The world population has aged significantly in the past 50 years, a reflection of declining fertility rates and rising life expectancy in many countries. However, there are significant differences across regions in the pace and timing of this transition, especially between fast-aging industrial nations and some developing countries, where population growth has remained high. This paper explores the role of these differences as a long-run determinant of international capital flows. Palgrave Macmillan Journals and POPULATION AGING AND GLOBAL CAPITAL FLOWS IN A PARALLEL UNIVERSE It develops a multiregion overlapping generations (OLG) model with perfect capital mobility, in which exogenous population and productivity growth are allowed to differ across regions and over time. The model is calibrated to match the evolution of income per capita levels across developed and developing countries and used to simulate the general equilibrium effects of historical and projected population trends on regional saving-investment balances. The basic effects of demographic change in this setting are intuitive. For example, a fast-aging region will observe a surge in saving as a large group of workers prepares to retire, while investment demand will fall, a reflection of the declining workforce. Assuming perfect capital mobility, this mismatch will generate capital outflows to regions with higher population growth, until the return on capital is equalized across regions. The paper makes several advances relative to the literature. It builds a Diamond (1965)-type model, in which agents move from dependent childhood through two periods of working age to retirement. This setup generates a life cycle profile for saving consistent with evidence from household survey data. Young workers save hardly at all, constrained by youth dependency effects. Instead, retirement saving happens late in life, between the ages of 40 and 60. Because the paper explicitly models childhood and retirement, it captures aggregate saving effects from changes in both youth and old-age dependency, which have been shown to be empirically important.1 The framework also allows for the possibility that lower youth dependency from declining fertility, an important feature across developed countries, may offset the adverse effects on aggregate saving from having many old people dissave in retirement.2 In addition, the model allows for possible effects from changes in population growth on labor supply. This is important because declining fertility in industrial countries has been associated with rising labor force participation rates among women, a development likely to spread to developing nations in coming years. Finally, this paper is more comprehensive than existing work, calibrating the model to have eight regions that divide up the world population along geographical lines and stages of development: North America, the European Union, Japan, Latin America and the Caribbean, China, Africa, the former Soviet Union (FSU) countries, and a region for the rest of the world. 3 The results suggest that differences in population trends around the world have been an important determinant of international capital flows over the postwar period. They explain the emergence as capital exporters of the Europea