Macroeconomic implications of demographic transition

Abstract

This thesis explores the macroeconomic impacts of demographic transition in emerging market economies (EMEs), emphasizing the delayed and distinct patterns of demographic change compared to advanced economies (AEs). These differences, shaped by variations in timing and speed, significantly affect key macroeconomic indicators such as current account balances, financial asset prices, and inflation, all of which are influenced by individuals’ saving and consumption decisions. The first objective develops a three-period small open economy model to analyze how demographic transitions impact the current account balance. The model’s analytical solution suggests that individuals’ consumption during their working years is inversely related to the probability of survival, indicating that rising life expectancy encourages higher savings. Simulations show that the model aligns closely with actual trends from 1990 to 2022, except for deviations observed in countries such as Japan, Brazil, China, Korea, and Thailand. The second objective empirically examines the relationship between changes in age structure and financial asset demand, addressing cross-sectional dependence and slope heterogeneity. The f indings show that a larger working-age population significantly increases demand for both risky and risk-free assets in AEs and EMEs. When the working-age population is divided into young (ages 20–39) and prime (ages 40–59) groups, the results reveal that the prime working-age group strongly influences demand for all asset classes, while the younger cohort has limited impact on risk-free assets. Additionally, the old-age dependency ratio positively affects demand for risk-free assets in AEs, as rising life expectancy drives greater retirement savings. In EMEs, however, this ratio negatively impacts demand for risk-free assets, reflecting that the benefits of rising life expectancy are yet to be fully realized. The third objective investigates the effects of demographic transitions on inflation dynamics, testing several hypotheses. The results suggest that the working-age population exerts disinflationary pressures in EMEs, largely due to wage stabilization and labor force growth. To address potential aggregation biases, the working-age population is disaggregated into young and prime age groups. The analysis reveals that the prime working-age group exerts disinflationary effects in both AEs and EMEs. Furthermore, the dependency ratio increases inflation in EMEs but reduces it in AEs. Collectively, these findings highlight the critical role of demographic structures in shaping macroeconomic outcomes. They underscore the need for policies tailored to the unique demographic and economic conditions of EMEs to effectively navigate the challenges and opportunities posed by demographic transitions.