Demographic Change, International Trade and Capital Flows

Trade in goods that are not perfect substitutes can considerably change the predictions of standard neoclassical models about the effects of asymmetric demographic developments. This paper considers a relative decrease in the population size of one country, when countries specialize in the production of different intermediate goods. The less those goods are substitutes, the stronger the long-run international spillover effects of the demographic shock will be. The degree of sustainability is crucial for the direction of capital flows between the countries and for the change in the interest rate. Depending on the saving rate of one country relative to the other, a shrinking labor force can lead to a higher interest rate, which is contrary to conventional findings