Population Aging in the Interdependent Global Economy: A Computational Approach with a Prototype Overlapping Generations Model of Global Trade

Masakazu Someya, Keiichiro Oizumi, Kazuhiko Oyamada and Ken Itakura

No 3925, EcoMod2012 from EcoMod

Abstract: Since the latter half of 1990s, it has been discussed that many developing countries are going to face serious population aging problem while these economies are still underdeveloped and not adequately prepared against aging yet in terms of institutional reform such as social security. As the global interdependence of national economies has been deepened, a socio-economic problem in one country comes to have significant influences on many other economies and its effect might spillover around the world. The main objectives of our study are to analyze the impact of social security reforms in one country on the other countries with special emphasis on trade and capital flows among regions. This study presents a basic analysis on interregional cooperative framework which may offset negative effects of population aging and make it possible to take advantage of the so-called "population dividends" that are derived from the population structure with a large size of working population relative to a small size of dependent population. A country under faster aging process would become a capital exporter to other countries at relatively moderate aging stage. As capital export would undermine assets over the long run, it would be possible for the faster aging country to eventually become a capital importer. Using a prototype Overlapping Generations (OLG) model applied to three regions with different demographic structure, we conduct simulation analysis to examine effects of pension reforms, such increase of contribution rate, decrease of replacement rate, and raising retirement age, on the patterns of interregional trade, capital flows, savings and economic growth.The simulation results revealed that, as previous works suggested, interregional capital movements between regions may play a significant role to moderate the impact of population aging and pension reforms. When contribution rate is increased in a pay-as-you-go pension system, its effect becomes just like the case of a tax increase. Savings may decrease so that the capital accumulation slows down, and consumption also may shrink. When the economy is open, relatively higher interest rate because of the scarce capital stock may induce foreign capital inflows and relax the decrease of consumption through growth effects. In addition, removing distortions in interregional trade, such as import tariff and non-tariff barriers, would promote interregional adjustment in resource and capital allocations.

Keywords: No specific country; General equilibrium modeling (CGE); Public finance and tax issues (search for similar items in EconPapers)
Date: 2012-07-01
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Working Paper: Population Aging in the Interdependent Global Economy: A Computational Approach with a Prototype Overlapping Generations Model of Global Trade (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ekd:002672:3925

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