Thursday, January 13, 2011

Are Demographic Changes Contributing to the Economic Crisis?

According this speech by the Deputy Governor of the Bank of Japan, Kiyohiko Nishimura, delivered at the 2011 AEA Meeting, there could be a relationship (HT De Gustibus Non Est Disputandum and NadaEsGratis). This graph for example shows how peaks of the demographic variable called inverse dependency ratio appears to be associated with peaks of real estate price runs:

The inverse dependency ratio increased with the boomers and now falls in the US as the population ages. Dr. Nishimura is suggesting that the demographic transition, even if not necessarily having caused the crisis, saps economic vitality and makes recovery in aging economies much harder and less probable than in previous similar episodes. This would explain for example the long stagnation of the Japanese economy.

If this is the case, the negative effects of the demographic transition may prove to be much more worrisome than previously acknowledged by economists, not restricting themselves to retirement and other benefits to elders.

It's interesting to notice that these problems aren't confined to rich countries. Brazilian economist Jorge Arbache, a colleague of mine, has written articles in which he alerts for the fact that the same demographic phenomenon is happening in China and won't take long to happen in Brazil, even though these countries are yet very far from having reached the status of developed countries.

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