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Discussion Paper Discussion Paper 149 (2019.10)

[No.149] Global Imbalances and Demographic Changes

Kazumasa IWATA
Saeko Maeda
Tetsuaki TAKANO
  Senior Economist



This paper is designed to investigate the relationship between global imbalance and demographic changes, providing a forecast of global imbalance of major countries/area (the US, the Euro area, Japan and China) in 2060. We adopt a neoclassical growth model in an open economy, where the current account balance can be explained by the differences of the Solow’s fundamental determinants of economic growth rate between home country and its trading partner countries/area. Net national saving rates play a major role in current account balances, given their large differences, while the labor augmenting technological changes show convergence tendency over coming decades. Demographic changes are represented by labor force growth rates which diverge, depending on the speed of aging and population decline. The positive labor growth rate and better performance of productivity of the US will work to maintain the current account deficit position at about 2% of GDP, leading to a large net foreign debt position. Further rise of the US budget deficit will aggravate the external debt and raise it to an unsustainable level. In contrast, Japan will accumulate the current account surplus mainly due to the maintenance of excess saving balance of non-financial corporate sector, despite the lower household’s saving rate in an aging process. Both the Euro area and China will maintain the current account surplus. However, the increase of excess investment balance of non-financial corporate sector in China will diminish its size of current account surplus, contributing to a reduction of the US current account deficit.