Working Paper Series no. 174: Global Ageing and Macroeconomic Consequences of Demographic Uncertainty in a Multi-regional Model

Abstract

In this paper, we investigate the impact of demographic uncertainty in a multi-regional general equilibrium, overlapping generations model (INGENUE 2). Specifically, we will consider the level of uncertainty in each of the ten major regions of the world, and their correlation across regions. In order to address these issues, we produce stochastic simulations of the world population for the ten regions until 2050. Then, we will analyse the economic consequences on a path by path basis over the period 2000-2050. These simulations allow us to assess the uncertainty induced into key macro-economic variables, the GDP growth rate and the world interest rate in particular, by uncertain future demographics. We show that the assumptions regarding interregional correlations of forecast errors are important in our model: they have a large impact on the uncertainty of the macroeconomic variables, and it appears that the macroeconomic adjustments can differ substantially if we consider independence or high correlation across the regions. In particular, the macroeconomic behaviour of the agents in the current account/saving problem differs significantly across regions according to the degree of interregional correlation.

Juha Alho and Vladimir Borgy
July 2007

Classification JEL : C68, F21, D91, J11.

Keywords : Computable General Equilibrium Models, International capital flows, Life cycle models and saving, Demographic trends and forecasts.