Population aging, pensions and cross-country spillovers in currency unions

Davoine, ThomasORCID: https://orcid.org/0000-0002-5941-0798 (September 2017) Population aging, pensions and cross-country spillovers in currency unions. [Research Report] 39 p.

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Population aging challenges the financing of social security systems in developed economies, as the fraction of the population in working age declines. The resulting pressure on capital-labor ratios translates into a pressure on factor prices and production. While European countries all face this challenge, the speed at which their population ages differs, and thus the pressure on capital-labor ratios. If capital markets are integrated, differences in population aging may lead to cross-country spillovers, as investors freely seek the best returns on capital. Using a multi-country overlapping-generations model covering 14 European Union countries, I quantify spillovers and find that capital market integration leads to redistribution across countries over the long run. For instance, GDP per capita would on average be 2.9 %-points lower in Germany in each of the next 50 years if capital markets were perfectly integrated and increases in labor income taxes maintained public debt constant, compared to a closed economy case; by contrast, GDP per capita would on average be 2.1 %-points higher in France, whose population ages slower than in Germany. I also show that pension reforms can change the cross-country redistribution patterns, some countries losing from capital market integration without the reform but winning with it. The research has policy and methodological implications.

Item Type: Research Report
Keywords: population aging, pensions, cross-country spillovers, policy coordination, overlapping-generations modelling
Funders: Horizon 2020
Classification Codes (e.g. JEL): C68, E60, F41, J11
Research Units: Former Research Units (until 2020) > European Governance and Public Finance
Date Deposited: 13 Sep 2017 06:45
Last Modified: 20 Nov 2019 08:52
URI: https://irihs.ihs.ac.at/id/eprint/4337

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