Demography and the U.S. current account deficit

Abstract

We examine whether aging in the trading partners of the U.S. has affected their demand for foreign (i.e., U.S.) assets enough to materially affect the U.S. current account balance. There is reason to think that demography may be at work in international capital flows because the standard life-cycle model of consumption behavior predicts that a household's age will influence its saving behavior. Moreover, simple national accounting identities link a country's current account balance to its savings–investment imbalance. Thus, differences in national age-profiles should affect the current account. To test this theory's plausibility and significance, I simulate a multi-region overlapping generations model that is calibrated to match the demographic differences among the major industrialized countries over the past 50 years. In the model, it is found that these differences can explain some of the observed long-term capital movements in the G-7. In particular, the model does a good job of predicting the size and timing of U.S. current account deficits.