Population Aging and Global Capital Flows in a Parallel Universe

This paper uses a multiregion overlapping generations model with perfect capital mobility to simulate the general equilibrium effects of projected population trends on international capital flows. It finds that retirement saving by aging baby boomers will raise the supply of capital substantially above investment in both the European Union and North America, causing both regions to export large amounts of capital to Africa, Latin America, and other emerging markets in the years ahead. Beyond 2010, however, baby boomers in the European Union and North America will dissave in retirement, causing both regions to become capital importers. This shift will be financed by capital flows from Latin America and other emerging markets, while Africa will remain dependent on foreign capital for the foreseeable future because of continued high population growth. Despite severe population aging, Japan is predicted to remain a substantial capital exporter beyond 2030. Copyright 2003, International Monetary Fund