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The South's demographic transition and international capital flows in a financially integrated world economy

Published online by Cambridge University Press:  07 February 2020

Frédéric Gannon ,
Gilles Le Garrec  and
Vincent Touzé
Frédéric Gannon
Affiliation:
U. Le Havre, Le Havre, France Sciences Po-OFCE, Paris, France
Gilles Le Garrec*
Affiliation:
Sciences Po-OFCE, Paris, France
Vincent Touzé
Affiliation:
Sciences Po-OFCE, Paris, France
*
*Corresponding author. E-mail: gilles.legarrec@ofce.sciences-po.fr
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Abstract

In the coming decades, the countries of the South will be facing the aging of the population faster than the countries of the North. This will have long-term economic consequences for the South but also for the North through the changing of international capital flows. To study the latter, we build a simple two-region two-period overlapping generations (OLG) model, assuming fully integrated financial markets. This allows us to determine the analytical expression of the world interest rate dynamics at general equilibrium and the resulting capital flows accruing to each of the two regions (the North and the South). From there, we analyze how a reduction in either fertility or mortality alters the magnitude of the international capital flows. Contradictory effects are evidenced. To clear-up any ambiguity and to study the South's demographic transition, which involves a succession of shocks, we propose numerical simulations. Even if the results stress that the institutional context and technological catching-up may matter, they suggest in a rather general way that the declines in both fertility and mortality tend to reduce the relative capital needs of the Southern economies and consequently their capital inflows. This, in turn, would be beneficial to the North's productive capacity, which should then hold more capital.

Keywords

Demographic transitioninternational capital flowsOLG

JEL classification

F40: General J10: General D91: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡ O33: Technological Change: Choices and Consequences • Diffusion Processes
Type
Research Papers
Information
Journal of Demographic Economics , Volume 86 , Issue 1 , March 2020 , pp. 1 - 45
Copyright
Copyright © Université catholique de Louvain 2020

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