Demographic Dynamics, Savings, Investment and Current Account

Abstract

The upturn in the world economy brought with it the renewed attention to the issues of current account imbalances. Whereas large part of it is political, the issue still attracts some economic attention. In this paper the empirical side of the current account dynamics is addressed. We enquire of the relationships between the current account and savings dynamics, with the emphasis on the role of the “high savings” demographic cohorts (the population and/or labor force between 40 and 64). With the emphasis on the EUs “large” countries, we conclude that there is a significant role of this “high saving” population group in determining the current account dynamics for the consistent “high” surpluses countries of Germany and Netherlands.

The role of this population group is, however, rejected for France, Italy and Spain. In those countries the current account dynamics is dominated by (seemingly unexpected) liberalization of capital flows and the subsequent need for stabilization policies.  Similarly, the dominant role of the demographic dynamic is rejected for the comparison, floating exchange rate countries of USA and Japan.