Demographic changes and current account imbalances in advanced economies

The motivation for this paper is derived from Cooper (2008) who postulates that widespread changes in birth rates, fertility rates and life expectancies may have an effect on current accounts. Including key demographic variables illustrates falling birth rates and fertility rates leading to current account surpluses for some countries or regions. Rising life expectancy is changing saving patterns resulting in current account deficits.

The main objective of this paper is to add demographic variables to a standard base model of the determinants of the current accounts. So we employ a benchmark model developed by Chinn, Eichengreen, Ito (2011) for a sample of 32 advanced countries for the period 1980-2012. The choice of only developed economies was three-fold. First, most of the imbalances are created by developed economies plus China. Second, these were the countries that underwent demographic changes as identified by Cooper (2008). Third, we wanted to minimize measurement error in reported official statistics for the developing economies.

Our independent variable is current accounts. Our independent variables include: birth rates, fertility rate, life expectancy rates, fiscal balance, capital account openness, relative income, relative dependency ratios for elderly segments of populations, private credit, liquid liabilities, terms of trade volatility, and real effective exchange rate.

We document a strong and significant correlation between countries' current account positions and our introduced measures of demographic changes such as: birth rates, fertility rates and life expectancy rates for a set of developed economies. The correlation is robust to different model specifications and estimation techniques. We find that on average an increase in life expectancy improves a country’s current account, and an increase in fertility rates, on average, worsens a country’s current account. Our paper supports a precautionary savings motive behind the emergence of global imbalances.