Pensions and Savings in a Monetary Union: an Analysis of Capital Flows

We analyse the economic impact of a simultaneous aging shock in two countries. The countries are identical in all respects except the financing scheme of their public pension system. While one relies on capitalization, the other one relies on a pay-as-you-go scheme. We show that the two countries react very differently to the demographic shock and its financial implications. Further, we find that the presence or the absence of capital mobility considerably affects the results, both in terms of the size of the burden as in terms of international capital allocation.