Transcript Climate Change - Sensible Policy

The Global Macroeconomic
Consequences of a Demographic
Transition
Warwick J McKibbin
Centre for Applied Macroeconomic Analysis, RSPAS, ANU;
Lowy Institute for International Policy, Sydney
The Brookings Institution, Washington DC;
Prepared for a seminar at the Harvard Program on the Global Demography of Aging. Cambridge Mass
Thursday, February 23
1
Overview
• Summary of Global Demographic trends
• Macroeconomic issues
• Alternative approaches
• Consequence of global demographic change in 10
regions from 2004 to 2050
• Conclusions
2
Figure 1: Population Growth Rate 1950-2050
3.5
3.0
USA
2.5
2.0
Europe
1.5
ROECD
Asia
1.0
Latin America
0.5
India
China
0.0
FSU
-0.5
DCs
-1.0
19
50
19 -55
55
19 -60
60
19 -65
65
19 -70
70
19 -75
75
19 -80
80
19 -85
85
19 -90
90
19 -95
95
20 -00
00
20 -05
05
20 -10
10
20 -15
15
20 -20
20
20 -25
25
20 -30
30
20 -35
35
20 -40
40
20 -45
45
-5
0
percentage per year
Japan
Source: UN, World Population Prospects: The 2004 Revision (Medium Variant)
Figure 2: Elderly Dependency Ratio 1950-2050
(ratio of adults 65+ to adults 15-65)
0.8
0.7
USA
0.6
Japan
Europe
0.5
0.4
Asia
Latin America
0.3
India
China
0.2
FSU
DCs
0.1
Source: UN, World Population Prospects: The 2004 Revision (Medium Variant)
2050
2045
2040
2035
2030
2025
2020
2015
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
0.0
1950
ratio
ROECD
Figure 3: Child Dependency Ratio 1950-2050
(ratio of children 0-14 to adults 15-65)
1.0
0.9
0.8
0.7
Japan
0.6
Europe
ROECD
0.5
Asia
0.4
Latin America
India
0.3
China
FSU
0.2
DCs
0.1
Source: UN, World Population Prospects: The 2004 Revision (Medium Variant)
2050
2045
2040
2035
2030
2025
2020
2015
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
0.0
1950
ratio
USA
Main Macroeconomic Impacts
• Aggregate saving, consumption, wealth
– Composition of consumption bundles
• Investment rates
• aggregate
• across sectors
• Labor markets
• Government budgets
• => General equilibrium impacts on trade and financial
flows and asset prices including real exchange rates
6
Macroeconomic Impacts
• What happens to the current account on any
country depends on the impact on savings
relative to investment
– A rise in savings relative to investment will
tend to improve the current account
– A fall in savings larger than a fall in
investment will tend to worsen the current
account
7
Alternative Approaches
• Cross sectional/time series econometric estimation of
aggregate saving and investment and growth equations
or current accounts
• Higgins (1998), Masson et al (1998), Helliwell (2004),
IMF (2004)
• Tend to find negative impact of dependency rates on
investment, savings and the current account
8
Alternative Approaches
• Vector Autoregression models with demographic and
economic variables (Kim and Lee (2005)
• Strong negative impact of dependency rates on saving
• Strong negative impact of dependency rates on current
account
9
Alternative Approaches
• Calibrated OLG models of single economies and multiple
economies
– Brooks (2005), Ingenue (2004)
• Calibrated CGE models of global economy
– Tyers (2005) using GTAP
10
Alternative Approaches
• Calibrated/estimated DIGE/DSGE models
Bryant/Faraque/Laxton
McKibbin/Nguyen/Callen/Battini
11
Theoretical Approach
• Follows Yaari/Blanchard/Weil models as extended by
Faruqee, Laxton, Bryant, McKibbin and others
• Demographics from the “bottom up”
– Approximate an OLG model using a probability of
death and exogenous profiles of birth and death rates
to generate cohort adjustment over time
– The demographic change is taken as exogenous and
cohort aggregation effects are calculated outside the
core model
12
Minimum Requirements
• Adults are distinguished from children so we can capture
the importance of changes in the youth dependency ratio
• Country specific models for the major countries/regions
so we can capture the asymmetries
13
Children
•
•
•
•
Are born to adults and stay children for 16 years
Do not supply labour
Do not hold financial wealth
Receive transfers from adults (which grow at the rate of
economy wide productivity growth) which they consume
• Have a different birth rate (defined as the number of
children as a percent of the adult population) than the
adult maturity rate (defined as the number of new adults
as a percent of the adult population)
• Have a different mortality rate than adults
14
Adults/workers
• Emerge at age 17 from the pool of children
• The adult maturity rate is the rate of emergence of adults
as a percent of the total adult population
• Are born with the productivity of the cohort alive in time t
and then acquire productivity based on the estimate age
earnings profiles over time.
• Die at a constant rate over time (major shortcoming but
needed for aggregation).
15
Introduce empirical age earnings profiles
• Labor income
– rises with age and experience
– reaches a peak in late middle age
– then declines gradually for the rest of life
• The shape of the age-earnings profile for individuals in
the economy is assumed to be the same for all
individuals and unchanged through time.
16
Introduce empirical age earnings profiles
• But the demographic composition of the population can
change over time.
• Because aggregate labor income is obtained by
aggregating over individuals that differ in age and
experience, moreover, the bottom-up aggregation over
individuals permits the demographic changes to
influence both the aggregate level and the age
distribution of labor income.
18
Introduce empirical age earnings profiles
• The hump-shaped profile of earnings by age influences
both the supply side and the demand side of the model
economy's behavior.
• Hence through these life-cycle effects, changes in
demographics significantly influence macroeconomic
outcomes.
19
Supply side effects
• On the supply side, the earnings profile is an indicator of
the changes in a cohort's relative productivity and its
supply of labor over its lifetime.
• The marginal product of capital will change and
investment will respond
20
Demand Side
• On the demand side, the anticipated path of labor
income determines the saving plans of consumers over
their lifetimes.
• Changes in investment will change the demand the
goods.
21
MSG-Cubed Model: Countries
•
•
•
•
•
•
•
•
•
•
Japan
USA
Western Europe
Rest of OECD
Eastern Europe and the Former Soviet Union
China
India
Other Asia
Latin America
Other Developing Countries
22
MSG-Cubed Model: Sectors
• Energy
• Non-Energy
• Capital Producing sector
23
MSG-Cubed model
• Estimated dynamic intertemporal model with Keynesian
short-run rigidities
– Adjustment costs in capital accumulation
– Financial capital mobile given risk premia
– Wages adjust slowly given labour market rigidities
– Financial markets for equity, bonds, money
– Mix of optimizing and rule of thumb decision rules
24
Question
• We want to estimate the overall impacts of demographic
change on the global economy from 2005 onwards
25
Approach
• Develop a baseline projection of the global economy
from 1985 to 2100 with a full demographic transition
where countries are adjusting towards a common steady
state with the same birth and death rates but from very
different initial conditions
26
Calculating the Impact of Demographic Change
• Solve the model again from 1985 to 2100 setting the
birth rates of children at the steady state rates
– The initial conditions in 1985 will already have the
expectations of a demographic transition in the initial
asset stocks.
– Allow some time for the asset adjustment to occur
– then examine the difference between the results with
and without the demographic transition from 2005.
27
Figure 5: Removing the Demographics
(A stylized Representation)
3.5
3
population growth
2.5
projection with
demographic
shock
2
1.5
1
0.5
0
1985 1994 2003 2012 2021 2030 2039 2048 2057 2066 2075 2084
-0.5
-1
Developing countries
Industrial countries
No Demographics
Figure 6: Change in Child Birth Rate (relative to steady state)
6
DCs
USA
4
Japan
India
Europe
3
ROECD
Latin America
Asia
2
Asia
ROECD
USA
Latin America
India
1
China
FSU
0
DCs
-1
Japan
FSU
Europe
China
-2
19
85
19
95
20
05
20
15
20
25
20
35
20
45
20
55
20
65
20
75
20
85
20
95
21
05
21
15
21
25
21
35
21
45
21
55
21
65
21
75
21
85
percentage deviation from steady state
5
Figure 7: Change in Adult Maturity Rate (relative to steady state)
3
DCs
India
USA
2
Japan
Latin America
Europe
2
Asia
ROECD
ROECD
Asia
1
USA
Latin America
India
1
China
FSU
0
DCs
-1
Japan
-1
FSU
Europe
China
19
85
19
95
20
05
20
15
20
25
20
35
20
45
20
55
20
65
20
75
20
85
20
95
21
05
21
15
21
25
21
35
21
45
21
55
21
65
21
75
21
85
percentage deviation from steady state
3
Figure 8: Contribution to GDP growth of Own versus Global Demographic Change
US GDP Growth
Japan GDP Grow th
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
0.5
% point change
0.6
0.4
0.2
0
-0.2
0
-0.5
-1
2045
2049
2045
2049
2037
2041
China GDP Growth
2033
2029
2025
2021
2017
global
ow n
Latin Am erica GDP Grow th
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
1.2
1
0.8
0.6
0.4
0.2
0
-0.2
-0.4
-0.6
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
% point change
1.5
1
0.5
0
-0.5
global
ow n
global
2037
2033
2029
2025
2021
2017
2013
2005
-1
20
05
20
10
20
15
20
20
20
25
20
30
20
35
20
40
20
45
20
50
% point change
2013
ow n
2041
global
2009
20
05
20
10
20
15
20
20
20
25
20
30
20
35
20
40
20
45
20
50
2005
-1.5
2009
% point change
1
0.8
ow n
Figure 10: Contribution to Total Savings of Own versus Global Demographic Change
US Total Savings/ GDP
Japan Total Savings/GDP
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
20
05
20
09
20
13
20
17
20
21
20
25
20
29
20
33
20
37
20
41
20
45
20
49
2049
ow n
global
China Total Savings/ GDP
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
global
ow n
global
ow n
2049
2045
2041
2037
2033
2029
2025
-0.5
2017
0
2013
0.5
4
3.5
3
2.5
2
1.5
1
0.5
0
-0.5
2005
% point change
1
20
05
20
10
20
15
20
20
20
25
20
30
20
35
20
40
20
45
20
50
% point change
2
1.5
ow n
Latin Am erica Total Savings/GDP
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
2021
2045
2041
2037
2033
7
6
5
4
3
2
1
0
2009
global
2029
2025
2021
2017
2013
2009
% point change
4
3
2
1
0
-1
-2
-3
-4
2005
% point change
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
Figure 11: Contribution to Private Investment of Own versus Global Demographic Change
US Investment/ GDP
Japan Investm ent/GDP
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
5
4
3
2
1
0
-1
-2
-3
% point change
4
3
2
1
0
-1
2041
2045
2049
2045
2049
2037
2033
2029
2025
2021
2017
2041
China Investment/ GDP
ow n
Latin Am erica Investm ent/GDP
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
ow n
global
2037
2033
2029
20
05
20
10
20
15
20
20
20
25
20
30
20
35
20
40
20
45
20
50
-1
2025
-0.5
2021
0
2017
1
0.5
4
3.5
3
2.5
2
1.5
1
0.5
0
2013
% point change
1.5
2005
2
% point change
2013
global
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
global
2009
2005
2049
2045
2041
2037
2033
ow n
2009
global
2029
2025
2021
2017
2013
2009
-2
2005
% point change
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
ow n
Figure 12: Contribution to Current Accounts of Own versus Global Demographic Change
US Current Account/ GDP
Japan Current Account/GDP
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
5
% point change
1
0.5
0
-0.5
3
2
1
global
20
05
20
09
20
13
20
17
20
21
20
25
20
29
20
33
20
37
20
41
20
45
20
49
0
20
05
20
10
20
15
20
20
20
25
20
30
20
35
20
40
20
45
20
50
-1
4
ow n
global
China Current Account/ GDP
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
% point change
1.5
1
0.5
0
-0.5
global
ow n
global
ow n
2049
2045
2041
2037
2033
2029
2025
2021
2017
2013
2005
2049
2045
2041
2037
2033
2029
2025
2021
2017
2013
2009
-1
2005
% point change
ow n
Latin Am erica Current Account/GDP
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
2009
% point change
1.5
Figure 13 : Contribution to Long Term Real Interest Rates of Own versus Global Demographic
Change
US Real 10 Year Bond Rate
Japan Real 10 Year Bond Rate
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
0.5
1
% point change
0.5
0
-0.5
-1
-1.5
0
-0.5
-1
-1.5
2049
2049
2041
2037
2033
2045
2
% point change
3
1
0.5
-2
2029
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
1.5
-1
-1.5
ow n
Latin Am erica Real 10 Year Bond Rate
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
0
-0.5
2025
2021
2017
global
China Real 10 Year Bond Rate
1
0
-1
-2
global
ow n
global
ow n
2041
2037
2033
2029
2025
2021
2017
2009
2005
-3
20
05
20
10
20
15
20
20
20
25
20
30
20
35
20
40
20
45
20
50
% point change
2013
ow n
2045
global
2009
20
05
20
10
20
15
20
20
20
25
20
30
20
35
20
40
20
45
20
50
2005
-2
2013
% point change
1.5
Implications
• Several adjustment mechanisms possible
– Reallocate inputs within economies
– Raise productivity growth to generate more resources
to deal with macroeconomic adjustments
• In an open economy
– Allow labor to flow across borders from labour
abundant into labour scarce countries
– Allow goods which embody labour to flow from labour
abundant countries into labour scarce countries
– Allow capital to flow from labour scarce countries to
labour abundant countries
36
Policy Implications to be explored Further
• Open economies to international trade so that more
labour can be imported into labour scarce countries
embodied in goods
• Deregulate protected sectors such as the service sector
in economies such as Japan to raise productivity growth
and free up scarce labour
• Allowing greater capital mobility (and better allocation of
capital) so that capital can flow to labour rather than
labour flow to capital.
37
Policy Implications
• Batini, Callen and McKibbin (2005) find that raising
productivity growth and reducing the risk of investing in
developing countries can swamp the macroeconomic
impacts of demographic change
38
Conclusions
• Demographic change projected over the next century
has a significant impact on aggregate economic
variables within countries as well as economic outcomes
between countries
• It is not sufficient to examine demographic change in a
country without some allowance for what is happening in
the world as a whole
39
Background Websites
www.sensiblepolicy.com
www.gcubed.com
40