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Demographics and the Evolution of Global Imbalances

System Working Paper 18-09 | Published March 23, 2018

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Author

Michael Sposi Federal Reserve Bank of Dallas

Demographics and the Evolution of Global Imbalances

Abstract

The working age share of the population has evolved, and will continue to evolve, asymmetrically across countries. I develop a dynamic, multicountry, Ricardian trade model with endogenous labor supply to quantify how these asymmetries systematically affect the pattern of trade imbalances across 28 countries from 1970-2014. Changes in both domestic and foreign working age shares impact a country's net exports directly through the demand for net saving and indirectly through relative labor supply and population growth. Counterfactually removing demographic-induced changes to saving unveils a strong negative contemporaneous relationship between net exports and productivity growth. Demographics, thus, alleviate the allocation puzzle, and do so to a greater degree than investment distortions. Neither labor market distortions nor trade distortions systematically reconcile the puzzle.