Research

The "demographic dividend" refers to the boost to GDP per capita growth countries experience during the part of the demographic transition when age dependency ratios plummet. The size and the source of the dividend are debated in the literature. Using newly constructed age-specific population data by country from the beginning of the demographic transition to the present day, this paper estimates the contribution of changing age structure to GDP per capita growth during the demographic transition. A quantitative overlapping-generations model is used to produce country-specific estimates of the dividend and to disentangle its drivers. Model simulations for 101 countries suggest a global average boost of 0.40 percentage points per annum to GDP per capita growth during the dividend period. Changing age structure explains 9.5% of total growth during the period of the demographic dividend on average. Countries with more rapid and more extreme changes in age structure experience larger dividends.

This research explores how export diversification interacts with macroeconomic shocks by investigating how a country's response to aggregate shocks is impacted by its level of export diversification. This is done through the lens of a version of the Melitz (2003) model, which is calibrated to five European countries and is solved quantitatively. The welfare effect of shocks to the balance of payments, production fixed costs, and domestic productivity is amplified by export diversification, while the effect of shocks to trade costs, foreign population, entry fixed costs, and foreign productivity is dampened by export diversification. The amplification of shocks, in particular, is a novel finding as the literature generally finds export diversification reduces macroeconomic volatility. The channel for it is how firms' reallocation of sales between domestic and export markets in response to the shock interacts with export diversification.

Profits accruing to foreign-owned firms can either be repatriated to the origin country or reinvested in the host country. Using bilateral country-level FDI earnings flow data, this paper empirically investigates what determines how much is reinvested in a given country. Panel data regressions are estimated on OECD country pairs for the time period 2005-2020 with origin and host country fixed effects. Macroeconomic conditions, institutional factors, agency problems, taxation, and global economic factors are considered as explanatory variables. Lagged independent variables are used as instruments in a 2SLS specification. The main finding is that geographical distance and the world GDP growth rate reduce reinvestment rates, while a shared legal origin increases them.

This research empirically investigates whether consumer confidence is affected by seasonal daylight fluctuations. Cross-country panel regressions are run with two different datasets. It is found that both solar elevation and sunlight duration positively affect consumer confidence. The presence of country and year-by-month fixed effects as well as controls for the business cycle help rule out alternative explanations. A one standard deviation increase in solar elevation or sunlight duration is associated with a 0.03–0.04 SD increase in consumer confidence.

This research explores theoretically, empirically and quantitatively the role of age diversity in determining aggregate productivity and output. Age diversity has two conflicting effects on output. On the one hand, due to skill complementarity across different cohorts, age diversity may be beneficial. On the other hand, rapid skill-biased technological change makes age diversity costly as up-to-date education tends to be concentrated among younger cohorts. To study this trade-off, I first build an overlapping-generations (OLG) model which, in view of these two opposing forces, predicts a hump-shaped relationship between age diversity and GDP per capita. This prediction is established analytically, and also quantitatively using real-world population data in an extended computational version of the model. The prediction is then tested using country-level panel data with a novel instrument, and regional data from Europe. Moving one standard deviation closer to the optimal level of age diversity is associated with a 1.5% increase in GDP per capita. In addition, consistent with the predictions of the model, the optimal level of age diversity is lower in economies where skill-biased technological change is more prevalent.

A puzzle in the literature on the macroeconomic effects of permanent income shocks is that exogenous permanent Social Security shocks do not have a sustained positive effect on real aggregate consumption. It has been argued that this is due to the implementation of contractionary monetary policy in wake of these benefit increases. This paper documents an alternative, potentially complementary explanation for the puzzle. Namely, using exogenous permanent Social Security shocks as well as minimum wage increases, I show that these permanent income shocks lead to an increase in inflation. Thus while nominal aggregate consumption gains can be observed in the data, real gains are small to non-existent due to the higher price level.

Foreign direct investment (FDI) can increase productivity and wages. However, it is also often accompanied by primary income deficits as foreign-owned firms repatriate their profits. The welfare effects of FDI are thus ambiguous. A particularly illustrative example of this phenomenon are the Visegrád 4 (V4) countries (Czech Republic, Hungary, Poland, Slovakia). This paper investigates whether FDI can be beneficial in the presence of profit repatriation using a general equilibrium model calibrated to the V4 economies. Counterfactual simulations suggest that the benefits of FDI outweigh the costs for these countries. On average, a 1% increase in the share of foreign firms is associated with a 0.17% increase in welfare. However, incentivising foreign firms to reinvest more of their profits domestically is, ceteris paribus, welfare-improving. A 10-percentage-point increase in the profit repatriation rate is associated with a 1.06% welfare gain on average.

This paper empirically investigates whether shifts in demographic structure have an im-pact on cross-border capital flows. Country-level panel data with global coverage is utilised in fixed effects regressions. Demographic variables are instrumented by their predicted values, which are calculated using a shift-share methodology. Local projections estimates complement the results with a dynamic perspective. The main finding is that there is a persistent positive relationship between a country’s old-age dependency ratio and its current and financial account balance – suggesting that population ageing increases net capital outflows. From the perspective of the current account, the mechanism is increased national saving, primarily by households, and exports. From the perspective of the financial account, the increased net outflows are happening primarily through a direct investment channel.

Capital controls are often discussed as a potential tool to stabilize macroeconomic fluctuations. However, empirical studies typically find that their use does not systematically respond to the business cycle. This paper revisits the cyclicality of capital inflow controls by considering two possibilities: governments may respond only when output deviations become sufficiently large, and their responses may vary with the underlying macroeconomic policy stance. Using quarterly panel data for 45 advanced and emerging economies from 2000 to 2015, we find that inflow controls are employed countercyclically, but only in response to large output fluctuations. Moreover, the propensity to tighten inflow controls during booms is significantly amplified in countries that pursue more countercyclical fiscal and monetary policies. These findings help reconcile the gap between theoretical expectations and existing empirical findings, suggesting the importance of accounting for threshold effects and macro-policy stance in evaluating capital flow management and incorporating adjustment frictions into theoretical models.

Cost-of-living divergence is documented in the United States over the 2000-2019 time period between different age groups, income groups, and between renters and owners. Using household-level regression analysis as well as a decomposition of CPIs into different expenditure categories, the paper finds that the divergence is largely driven by housing and health expenditures. In particular, the way housing costs evolved created a gap between the inflation experienced by renters and owners, while rapid health cost inflation led to cost-of-living divergence along generational lines. Two consequences of cost-of-living divergence are documented. First, generational income inequality is dampened, while pure income inequality is exacerbated if one uses group-specific CPIs to convert nominal income into real income. Second, Social Security benefit increases did not keep up with the cost of living of the elderly because older cohorts experienced above-average inflation. Finally, the paper shows that expansionary monetary policy is behind some of the renter/owner cost-of-living divergence, but not the health-related generational divergence.

There has been a recent trend in a number of major economies towards the introduction of large-scale recycling schemes. In this paper we explore how such initiatives affect the sectoral composition of economies throughout the world via global raw material markets and trade linkages. We build a multi-country multi-sector model of recycling and trade, which shows that increased recycling in rich resource-poor countries incentivizes these countries' poor resource-rich trade partners to transition from mining to manufacturing. The model suggests that the channel for this transition is decreased global raw material demand, which exerts a downward pressure on raw material prices. Numerical simulations of our model indicate that the quantitative effects of increased recycling via this mechanism are significant.

In this paper, we investigate the role of parental exposure to democratic institutions in shaping social mobility. First, we find that people whose parents hail from more democratic societies experience more upward mobility. This result is established in a sample of second-generation immigrants in the United States. Identification primarily focuses on exploiting within-origin-country variation in democracy over time. Second, we investigate the potential channel for this finding. We find that people in more democratic societies believe more in meritocracy, and that this difference in beliefs translates into higher upward mobility. Our results imply that people who grew up in more democratic societies hold more favorable beliefs about meritocracy, that these beliefs are retained after emigration, and are transmitted to the next generation. This ultimately affects how successful second-generation immigrant children are relative to their parents.