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How are the international capital flows of rapidly aging countries affected by the elderly working longer?

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  • Inagaki, Kazuyuki

Abstract

The labor force participation rate of the elderly has markedly increased in countries with a rapidly aging population. To assess the interaction effects between elderly labor supply and population aging, this paper examines international capital flows. Using an open-economy overlapping-generations model, we show analytically that current account balances in countries with higher longevity deteriorate at a faster rate when the elderly work longer. This interaction effect mainly arises from the productivity effect of life expectancy, which amplifies the impact of an elderly labor supply through the improvement in health, and thus productivity, in old age. We test the empirical validity of our theoretical results using US current account data. The interaction effect between the labor force participation rate of the elderly and life expectancy is significantly negative, suggesting that the theoretical prediction holds empirically. Therefore, recent trends in population aging and retirement age will worsen current account balances.

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  • Inagaki, Kazuyuki, 2021. "How are the international capital flows of rapidly aging countries affected by the elderly working longer?," Economic Modelling, Elsevier, vol. 97(C), pages 285-297.
    • Handle: RePEc:eee:ecmode:v:97:y:2021:i:c:p:285-297
    DOI: 10.1016/j.econmod.2020.11.003
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    More about this item

    Keywords

    International capital flows; Elderly labor supply; Population aging; Current account balances; Cointegration;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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