Demographic transition and economic growth: insights from the dynamic trade-multiplier

Leonarda Srdelic and Marwil J Dávila-Fernández

Cambridge Journal of Economics, 2025, vol. 49, issue 4, 755-795

Abstract: Europe is experiencing a dramatic shift in its demographic structure, ending three centuries of unprecedented population growth. However, there are few empirical estimates of the realised effect of such a process on economic performance. The present article attempts to fill this gap in the literature. We innovate by using the dynamic trade-multiplier, that is the growth rate compatible with equilibrium in the balance-of-payments (yBP), to assess the impact of demographic transition in six European countries between 1971 and 2019. Unlike most studies in the field that rely on Cobb–Douglas production functions, we adopt an open-economy approach under the premise that growth is balance-of-payments constrained in the long run. Applying time-varying-parameter estimation techniques, we estimate yBP and show it fairly approximates output growth trends. We proceed by documenting the existence of a robust correlation between the trade-multiplier and population dynamics, with the latter figuring as one of its potential determinants. The obtained effects are moderate, and there is significant heterogeneity between countries. In Italy, for instance, a 10-point increase in the old-age dependency ratio is related to a 3% lower yBP, while in France, we have the opposite effect. Moreover, the effects of population decline are conditional to controlling for migration, with Germany and Austria differentiating themselves from their Southern European counterparts.

Keywords: Demographic transition; Long-run growth; Thirlwall’s law; Europe (search for similar items in EconPapers)
Date: 2025
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