Demographics, Wealth, and Global Imbalances in the Twenty-First Century

A popular argument — the “asset market meltdown” of the 1990s, revived as the “great demographic reversal” — holds that once the old start running down their savings, aging will push interest rates back up. This paper argues the opposite, and its central object is the compositional effect: the direct impact of a changing age distribution on log wealth-to-GDP, holding the age profiles of wealth and labor income fixed. In the authors’ baseline overlapping-generations model that statistic is a sufficient statistic for the change in wealth-to-GDP in a small open economy, and aggregated across countries — combined with asset supply and demand semielasticities obtained from further sufficient-statistic formulas — it pins down the general equilibrium effect on returns, wealth and global imbalances. Measuring it from 2019 UN population projections and household surveys for 25 countries, they find it positive everywhere between 2016 and 2100, ranging from 17 log points in Sweden to 45 in China and 56 in India, with a wealth-weighted global average of 31.7; the driver is that the old hold much more wealth than the young and on average do not dissave much as they age. In their central case, with an elasticity of intertemporal substitution of 0.5 and a unit elasticity of capital-labor substitution, the world return falls by 1.07 percentage points by 2100, global wealth-to-GDP rises by 8.9 log points (456% to 498% of world GDP), and net foreign asset positions diverge sharply — India’s rising by 179 percentage points of GDP and Germany’s falling by 56. The magnitudes depend on those two parameters (the return falls by between 0.58 and 2.45 percentage points across the range considered), the projections are taken as given rather than explained, indirect effects such as changes in technology or market structure are ruled out, and the authors report that rising government debt “can mitigate or even undo” the effect on real interest rates.

Frédéric Martenet | Macro Paper Warehouse

Demographics, Wealth, and Global Imbalances in the Twenty-First Century