 Effects of Population Aging on International Investment (in Korean)Jin Soo Lim () and
Young Rae Kim ()
No 2017-26, Working Papers from Economic Research Institute, Bank of Korea Abstract: This paper conducts an empirical estimation of the effects of population aging on international investment, in consideration of the fact, especially in an environment of deeply integrated global financial markets, that differences in degrees of aging across countries can amplify capital movements. Through this estimation, this paper examines whether the life-cycle hypothesis of Modigliani also applies to the external sector, and the international investment assets accumulated are used to cover consumption when a mismatch between income and consumption occurs due to population aging. We analyze the impacts of demographic variables--the old-age dependency ratio and the pace of aging--on foreign investment (foreign direct investment (FDI) and foreign portfolio investment (FPI)), using annual data for 54 countries between 2001 and 2015. We find as a result that the life-cycle hypothesis holds for the external sector as well. First, our study shows that population aging leads to a significant decrease in international investment. A reduction in international investment assets means a decline in future sources for supply of foreign currency. This suggests that if international investment assets decrease dramatically, it could lead to concerns about possible insolvency and cause the creditworthiness of a country to fall, resulting in pressures for outflows of capital from it. Meanwhile, looking at the effects depending upon the nature of investment, we find that the negative impact on FDI due to aging is more significant than that on FPI. While foreign investment increases significantly with a bigger working age population, it declines significantly as aging proceeds more rapidly. The level of significance of the pace of aging is also much higher than that of the old-age dependency ratio. Given these effects of population aging on international investment, there is a possibility that progress in population aging could undermine stability in the external sector. In this regard, Korea, one of the rapidly aging societies, should make preparations to minimize the negative effects of aging on its external sector. Viable strategies in this regard are improving the primary income balance through promoting foreign investment, and introducing policies to increase the birthrate. Meanwhile, additional studies are required to analyze in greater detail the effects of aging from various perspectives, such as that of behavioral changes in international investment depending upon maturity and upon investor type, and that of the external debt dynamics. We hope that this paper might pave the way for such future research. Keywords: Population aging; International investment (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bok:wpaper:1726 Access Statistics for this paper More papers in Working Papers from Economic Research Institute, Bank of Korea Contact information at EDIRC. |
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