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The paper presented in this seminar provides a framework to endogenize rates of return for risk-free bonds and risky capital in an overlapping generation model, where the return on capital is endogenized by introducing idiosyncratic production shocks to avoid computation challenges associated with aggregate production shocks in the literature. The framework enables the interaction between financial markets and macroeconomic conditions in a production economy. Based on this framework, the paper presented in this seminar first examines life-cycle portfolio choice in a steady state, and illustrates that several factors such as borrowing costs, labor income and production risk play important roles in life-cycle portfolios. The paper then shows that population aging has important impacts on macroeconomic conditions, life-cycle behaviors and financial market structures. More specifically, population aging results in higher capital-labor ratios, and pushes down the rates of return on both assets. The bond market shrinks significantly, and capital decreases if the fertility rate declines but increases if the mortality rate declines, leading to structural change in the financial market. The author concludes that the impacts on life-cycle variables are quite different in the fertility and mortality cases particularly at the late stage of life.
Phitawat Poonpolkul is a PhD candidate in economics at the Centre of Applied Macroeconomics Analysis (CAMA) in Crawford School of Public Policy. He is also an ARC Centre of Excellence in Population Ageing Research (CEPAR) affiliated research student. His primary research interests are on macroeconomics and demographic changes. In particular, he focuses on the implications of demographic changes on asset allocation, monetary policy, and fiscal sustainability. Prior to his study, he has more than four years of experience as a senior economist at the Central Bank of Thailand.