Effect of world fertility scenarios on international living standards

This paper applies a two good, multi-region Ramsey-Solow model to determine the impact of future demographic change on international living standards and the optimal rate of national saving. Notable features of the model include: an outward looking model of utility, a premium in the interest rate for capital importing regions, an exchange rate expressed as the relative price of traded and non-traded goods, and a vintage model of production. The world economy is divided into nine regions consisting of the eight regions in the United Nations long run demographic projections (1998 Revision) plus Japan as a separate region. The model is simulated for the low, medium and high fertility scenarios as projected for all regions by the United Nations. The model suggests that there will be a flow of international capital from the ageing regions to the younger regions; and that the world interest rate will fall. The lower world interest rate will cause a loss in living standards for ageing regions, the lenders, and a gain for the younger regions, borrowers. Lower fertility leads to greater downward movement in the world interest rate, thereby increasing the loss to ageing regions and the gain to younger regions of demographic change. The impact on living standards of alternative fertility rates is dominated by the dependency effect, with the capital widening and capital intensity effects playing minor roles. The real exchange rate response to demographic change turns out to be small in this model, particularly for the developing regions.