Capital Flows & Demographypages.stern.nyu.edu/~dbackus/BCH/ms/BCHM_cmsg_slides.pdf · Backus (NYU)...

Capital Flows & Demography

Dave BackusBased on work by Tom Cooley, Espen Henriksen, and Jan Moller

Canadian Macroeconomic Study GroupMontreal | November 2, 2012

This version: November 8, 2012

Backus (NYU) Capital Flows & Demography 1 / 35

Outline

Capital flows: thoughts

Capital flows: evidence

Demography

Model (work in progress)

Saving and investment in China


Thoughts

Capital Flows: Thoughts


Thoughts

Thoughts about capital flows

Michael Bordo, “Globalization in historical perspective,” 2002

The fifty years before World War I saw massive flows ofcapital from Western Europe to (mainly) the Americas andAustralasia. At its peak, the outflow from Britain reachednine percent of GNP and was almost as high in France,Germany, and the Netherlands. Private capital movedessentially without restriction ... into bonds that financedrailroads and other infrastructure — and into governmentdebt.

Link: http://econweb.rutgers.edu/bordo/nabe.pdf


Thoughts


Lars Jonung, “Sweden under the gold standard,” 1984

In the second half of the nineteenth century, Sweden began aprocess of industrialization financed by considerable capitalimports which transformed a basically agrarian country intoan industrialized society.

From Bordo & Schwartz, Retrospective on the Gold Standard


Thoughts

Thoughts about capital flowsC

A/G

DP

1850 1860 1870 1880 1890 1900 1910

−0.

20−

0.10

0.00

0.10

AUSCAN

DEUSWE

GBRUSA

Source: Jones and Obstfeld


Thoughts


Michael Bordo, “Globalization in historical perspective,” 2002

A striking feature is the size and persistence of currentaccount deficits in this period, esp in Australia, Canada,Argentina, and the Nordic countries, as well as the surplusesof the UK and France.

This globalization of finance had its dark side — in periodiccrises when capital flows abruptly reversed themselves.

Link: http://econweb.rutgers.edu/bordo/nabe.pdf


Thoughts


John Maynard Keynes, 1941-42

I disagree most strongly that the control of capitalmovements may be unnecessary. ... I see no reason to feelconfidence that the more stable conditions [of the post-warera] will remove the more dangerous movements [ofcapital].

Central control of capital movements, both inward andoutward, should be a permanent feature of the post-warsystem.

Quoted by Crotty, JEL, 1983


Thoughts


Daniel Gross, New York Times, May 8, 2005

[US] imbalances are eerily reminiscent of recent economiccrises. Could we see a perfect storm [for the US economy]?If so, what would it look like?

⋆ Nouriel Roubini estimates that long-term interest rates inthe US could rise sharply and the dollar fall.

⋆ Jeffrey Frankel adds: “some of us have been warning of thishard-landing scenario for more than 20 years.”


Thoughts


Group of 20, Communique, April 15-16, 2011

We agreed on a set of indicative guidelines ... to addresspersistently large imbalances. We now launch ... anin-depth assessment of the nature of these imbalances andthe root causes of impediments to adjustment. ... We willascertain for our next meeting the corrective and preventivemeasures.

Øystein Olsen, Norges Bank, March 2011

Global trade imbalances have been reduced somewhat overthe past two years, but there is a considerable risk that theywill persist. They must be corrected.


Thoughts


Dick Caves and Ron Jones, World Trade and Payments, 1973

By accounting rule, credits (or receipts) make the balancepositive or “favorable.” Debits are “unfavorable.” Notice thegravitational pull of semantics! The receipts side owns all thegood words, and has done so since the eighteenth-centurymercantilists made a virtue of “storing up treasure.”

(first edition, page 87, lightly edited)


Thoughts

Thoughts: summary

Long history of ambivalence over capital flows

I Facilitator of economic growth?I Or source of instability?

Suggestion: don’t let the words decide

I Find and replace:“global imbalances” ⇒ “international capital flows”

Our focus

I Where do capital flows come from?I Why are they so persistent?


Evidence

Capital Flows: Evidence


Evidence

Evidence: capital flows

Largest inflows Amount (b$US) Largest outflows Amount (b$US)

United States –470 China 306Italy –72 Japan 195Spain –63 Germany 176United Kingdom –56 Mideast oil 150France –53 Switzerland 75India –49 Russia 71Turkey –49 Netherlands 56Canada –49 Norway 53Brazil –47 Taiwan 41Greece –32 Sweden 30Australia –32 Korea 28Portugal –23 Malaysia 28

Total inflows –1183 Total outflows 1466

Source: IMF, WEO, April 2011 version, data for 2010


Evidence

Evidence: capital flowsC

A/G

DP

1970 1980 1990 2000 2010

−5

05

10 AUSCAN

CHNDEU

JPNUSA

Source: World Bank, World Development Indicators


Evidence

Evidence: net foreign assetsN

FA/G

DP

1970 1980 1990 2000

−0.

6−

0.4

−0.

20.

00.

20.

4

AUSCAN

CHNDEU

JPNUSA

Source: Lane and Milesi−Ferretti


Evidence

Evidence: capital flows and stocks

Capital flow variation is low-frequency(so much for HP filtering)

Ditto net foreign assets

No evident tendency for either to move toward zero(where’s the “external balance condition”?)


Demography

Demography


Demography

Evidence: demography

0.00

0.02

0.04

0.06

0.08

0.10

0.12 1950

1980

2010

2040

World

0−4 10−14 20−24 30−34 40−44 50−54 60−64 70−74 80−84 90−94 100+5−9 15−19 25−29 35−39 45−49 55−59 65−69 75−79 85−89 95−100

Source: United Nations, Population Estimates and Projections


Demography


0.00

0.02

0.04

0.06

0.08

0.10

1950

1980

2010

2040

Canada

0−4 10−14 20−24 30−34 40−44 50−54 60−64 70−74 80−84 90−94 100+5−9 15−19 25−29 35−39 45−49 55−59 65−69 75−79 85−89 95−100



Demography


0.00

0.02

0.04

0.06

0.08

0.10

1950

1980

2010

2040

United States

0−4 10−14 20−24 30−34 40−44 50−54 60−64 70−74 80−84 90−94 100+5−9 15−19 25−29 35−39 45−49 55−59 65−69 75−79 85−89 95−100



Demography


0.00

0.02

0.04

0.06

0.08 1950

1980

2010

2040

Germany

0−4 10−14 20−24 30−34 40−44 50−54 60−64 70−74 80−84 90−94 100+5−9 15−19 25−29 35−39 45−49 55−59 65−69 75−79 85−89 95−100



Demography


0.00

0.04

0.08

0.12 1950

1980

2010

2040

Japan

0−4 10−14 20−24 30−34 40−44 50−54 60−64 70−74 80−84 90−94 100+5−9 15−19 25−29 35−39 45−49 55−59 65−69 75−79 85−89 95−100



Demography


0.00

0.04

0.08

0.12 1950

1980

2010

2040

China

0−4 10−14 20−24 30−34 40−44 50−54 60−64 70−74 80−84 90−94 100+5−9 15−19 25−29 35−39 45−49 55−59 65−69 75−79 85−89 95−100



Model

Model (a progress report)


Model

Model: motivation

Capital flows and stocks are persistent

Demography inherently persistent — and different across countries

Worth exploring a connection?

[Apparently yes: Attanasio-Kitao-Violante, Bloom-Canning,Boersch-Supan-Winter, Brooks, Domeij-Floden, Feroli, Ferrero,Henriksen, Krueger-Ludwig, and others all had the same idea]


Model

Model: structure

One-good world

Overlapping generations, realistic mortality rates

Key ages: start working/consuming at 21, retire at 65

Preferences: power utility over consumption, fixed labor supply

Technology: CES production, country-specific productivity

Today: explore impact of changes in life expectancy


Model

Model: mortality

Age

Con

ditio

nal s

urvi

vial

pro

babi

lity

0 20 40 60 80 100

0.65

0.75

0.85

0.95

Life expectancy at birth: 60 yearsLife expectancy at birth: 70 yearsLife expectancy at birth: 80 years


Model

Model: age distribution

Age

Sta

tiona

ry r

elat

ive

coho

rt s

izes

0 20 40 60 80 100

0.00

00.

005

0.01

00.

015



Model

Model: net foreign assets

Capital allocated to equate marginal products

I Connected to age distribution via effective labor inputI Equates K/Y across countries

Net worth follows from life-cycle saving

I Saving and net worth depend on life expectancyI Also age distribution

NFA is difference between net worth and capital stock


Model

Model: steady state calculations

Impact of life expectancy

Two versions

I Closed economy: capital stock and interest rate adjustI Open economy: interest rate fixed, NFA adjusts


Model

Model: closed economy net asset profile

Age

Net

Wor

th

0 20 40 60 80 100

05

1015



Model

Model: closed economy capital and wealth

60 65 70 75 80 85Life Expectancy at Birth

Rat

io to

GD

P0

12

34

56

CapitalNet Worth


Model

Model: closed economy interest rate

60 65 70 75 80 85Life expectancy at birth

Inte

rest

Rat

e0.

000.

010.

020.

030.

040.

050.

06


Model

Model: open economy net asset profile

Age

Net

Wor

th

0 20 40 60 80 100

05

1015



Model

Model: open economy capital and wealth

60 65 70 75 80 85Life Expectancy at Birth

Rat

io to

GD

P0

12

34

56

CapitalNet Worth


China

China


China

Why are China’s saving and investment rates so high?

0.0 0.1 0.2 0.3 0.4 0.5 0.6

0.0

0.1

0.2

0.3

0.4

0.5

0.6

Investment (Ratio GDP)

Sav

ing

(Rat

io to

GD

P)

Circle area proportional to GDP

USA

CHN

JPN

DEU

IND

Source: IMF, WEO, April 2011, data for 2010


China

Does China have too much capital?I/Y

1970 1980 1990 2000 2010

0.15

0.20

0.25

0.30

0.35

0.40

AUSCANCHN

GERFRAITA

JPNNORUSA

Source: Penn World Tables


China

Does China have too much capital?K

/Y

1970 1980 1990 2000 2010

1.0

1.5

2.0

2.5

3.0

3.5

4.0

AUSCANCHN

GERFRAITA

JPNNORUSA

Source: Penn World Tables, authors’ calculations


China

Why is saving so high?

Demography?

Precautionary saving?

High “business saving”?

Other?


Final thoughts

Last thoughts

Capital flows

I A fact of life for more than a centuryI PersistentI A role for demography?I What else would you suggest?

Open questions

I Why are capital-output ratios so different across countries?I Why are saving rates so different across countries?I Why is China’s so high?


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