{
  "title": "Demographics, Old-Age Transfers and the Current Account",
  "publication": "IMF Working Papers, December 7, 2018",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2018/12/07/demographics-old-age-transfers-and-the-current-account-46386",
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  "summary": "Building on the evolving literature on the topic, this paper reviews the relationship between demographics and long-run capital flows in both theory and in the data.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Paper authors: Mai Dao, Callum Jones.\n- Publication date: December 7, 2018.\n- Core focus: Reviews the relationship between demographics and long-run capital flows in both theory and in the data.\n- Approach: Develops a two region overlapping generations model where countries differ in their population growth and mortality risk.\n- Main finding (model): Population structure and life expectancy (which affects the need to save to meet old age consumption) affect current account levels.\n- Main finding (transfers): Countries with more generous unfunded transfer schemes tend to have lower saving and more capital inflows over the long-run, although this effect may be dampened by natural limits (on taxation) of these schemes.\n- Empirical support: The key predictions of the model are generally supported by a rich panel dataset."
    },
    {
      "heading": "Model, mechanisms, and predictions",
      "content": "- Model type: two region overlapping generations (OLG) model.\n- Cross-country differences modeled: population growth and mortality risk.\n- Mechanism emphasized: life expectancy affects the need to save for old-age consumption, thereby influencing saving rates and current account levels.\n- Role of transfer schemes:\n  - Unfunded (pay-as-you-go) old-age transfer schemes reduce private saving incentives.\n  - More generous unfunded transfer schemes are predicted to generate more capital inflows (i.e., lower current account balances), subject to constraints.\n  - Dampening factor: natural limits on taxation that finance these schemes can limit the magnitude of the effect."
    },
    {
      "heading": "Empirical analysis",
      "content": "- Data: A rich panel dataset is used to test model predictions.\n- Result: The key predictions of the OLG model are generally supported by the panel evidence presented."
    },
    {
      "heading": "Policy implications and considerations",
      "content": "- Demographic changes (population structure and life expectancy) should inform assessments of countries’ long-run saving behavior and current account positions.\n- Design and sustainability of old-age transfer schemes matter for cross-border capital flows:\n  - Generosity of unfunded schemes can lower national saving and increase capital inflows.\n  - Fiscal and political constraints on taxation to finance unfunded schemes can limit these effects, implying trade-offs between intergenerational redistribution and external balance dynamics.\n\n---\n\n Content in this bundle\n\n- Demographics, Old-Age Transfers and the Current Account, WP/18/264, December 2018\n  - Demographics, Old-Age Transfers and the Current Account, WP/18/264, December 2018 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Demographics, Old-Age Transfers and the Current Account, WP/18/264, December 2018 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2018/12/07/demographics-old-age-transfers-and-the-current-account-46386"
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    "Authors: Mai Dao, Callum Jones",
    "Published: December 7, 2018",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781484385906.001",
    "Paper authors: Mai Dao, Callum Jones.",
    "Publication date: December 7, 2018.",
    "Core focus: Reviews the relationship between demographics and long-run capital flows in both theory and in the data.",
    "Approach: Develops a two region overlapping generations model where countries differ in their population growth and mortality risk.",
    "Main finding (model): Population structure and life expectancy (which affects the need to save to meet old age consumption) affect current account levels.",
    "Main finding (transfers): Countries with more generous unfunded transfer schemes tend to have lower saving and more capital inflows over the long-run, although this effect may be dampened by natural limits (on taxation) of these schemes.",
    "Empirical support: The key predictions of the model are generally supported by a rich panel dataset.",
    "Model type: two region overlapping generations (OLG) model.",
    "Cross-country differences modeled: population growth and mortality risk.",
    "Mechanism emphasized: life expectancy affects the need to save for old-age consumption, thereby influencing saving rates and current account levels.",
    "Role of transfer schemes:",
    "Data: A rich panel dataset is used to test model predictions.",
    "Result: The key predictions of the OLG model are generally supported by the panel evidence presented.",
    "Demographic changes (population structure and life expectancy) should inform assessments of countries’ long-run saving behavior and current account positions.",
    "Design and sustainability of old-age transfer schemes matter for cross-border capital flows:",
    "**Demographics, Old-Age Transfers and the Current Account, WP/18/264, December 2018**"
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