The joint macroeconomic impacts of capital markets integration and fertility

Population aging puts pressure on the financing of pension systems in many developed economies over the long run. Higher fertility would reduce the speed at which a population ages, and thus ease the financing pressure. The positive fiscal externality of childbearing decisions is well known in a single-country context. I perform a quantitative investigation of this externality in a multi-country context, to investigate the role of capital markets integration. On a sample of 14 European countries confronted with population aging, I find with simulations that the fiscal gains from a 70-years increase in fertility are on average 1.3 larger with integrated capital markets than with separated capital markets in 50 years, while the GDP per capita gains are 5.0 larger. Positive fertility shocks indeed depress the capital-labor ratio, increase the interest rate and thus attract foreign investors, when capital markets are open. Fertility increases and capital markets integration are however not sufficient to deal fully with the public finance challenge generated by population aging. More reforms are needed