Demographic Changes and Real Exchange Rates: Future of an Aging Economy

Sangyup Choi, Chaewon Kim and Inhwan So
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Chaewon Kim: Yonsei University

No 2026rwp-285, Working papers from Yonsei University, Yonsei Economics Research Institute

Abstract: We examine the role of demographic change in long-run real exchange rate (RER) determination. Demographic shifts affect saving and investment behavior, labor supply, and the relative demand for tradable and non-tradable goods, and may therefore influence RERs beyond standard macroeconomic fundamentals. We estimate a panel cointegration model for 75 countries over 1970-2024 that augments a standard long-run RER specification with four demographic variables: the old-age dependency ratio, fertility, life expectancy, and net migration. Demographic variables remain informative even after controlling for productivity. We also complement the baseline specification with a full age-distribution approach, which provides an internally consistent representation of demographic change. Combining the estimated long-run relationships with projections from the United NationsWorld Population Prospects, we construct conditional RER projections through 2050. Economies projected to age more rapidly tend to face long-run real appreciation pressure.

Keywords: Real exchange rate; Demographic changes; Panel cointegration; UNWorld Population Prospects; Out-of-sample projections (search for similar items in EconPapers)
JEL-codes: D31 E21 F41 J11 (search for similar items in EconPapers)
Pages: 76pages
Date: 2026-04
New Economics Papers: this item is included in nep-age
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