International Debt in a Demographically Divided World

Abstract

In research on closed and open economies, fluctuations in economic activity triggered off by productivity shocks figure prominently (see Kydland and Prescott [1982], Cantor and Mark [1987] and Clarida [1990]). A much neglected determinant of economic fluctuations is the change in the demography of a country. Van Imhoff [1989a] has shown for a closed economy that a permanent demographic shock can trigger off real business cycles. This finding may be more attractive to the student of (real) business cycles than the finding by King et al. [1988a], who find that recurrent technology shocks are needed to generate economic fluctuations in a standard neoclassical growth model. Only recently Becker and Barro [1988,1989] have stressed the need for dynamic general equilibrium models with endogenous population growth. This chapter will not go as far as to endogenise fertility choice or migration but instead it will look to the question of how (exogenous) demographic shocks are transmitted to production, consumption, capital and debt accumulation.