Demographic Trends, Fiscal Policy and Trade Deficits

Andrea Ferrero

No 444, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: In this paper, I argue that demographic factors play a central role in accounting for the trade deficit experienced by the U.S. during the last three decades. The main idea is that cross-country demographic differentials lead to adjustments in savings and investments which are associated with international capital flows towards relatively young and rapidly growing economies. I develop a tractable two-country framework with life-cycle structure that formalizes this intuition. The model permits to illustrate analytically and quantitatively the contribution of demographic variables in determining the equilibrium trade balance. I show that persistent differences in population aging can explain a significant fraction of the negative trend in the U.S. trade balance. Notably, the explicit consideration of the demographic transition also helps to reconcile the dynamics of the trade balance with the evolution of the U.S. fiscal deficits and generates a declining pattern for the real interest rate broadly consistent with the data

Keywords: External Imbalances; Aging; Fiscal Deficits (search for similar items in EconPapers)
JEL-codes: F32 H87 J11 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-dge, nep-int and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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