PhD Seminar (Econ)
Date & time
This paper investigates the effect of child dependency on the economy and external imbalances under an asymmetric demographic transition and productivity shocks. It develops a two-country model with life-cycle features that explicitly models child dependency. Simulations show that child dependency changes both the steady-state and the transition dynamics under a demographic shock. Specifically, the paper compares the effects of the same fertility, mortality, and productivity shocks across models with and without child dependency and finds that the child dependency changes the impact of fertility transition on external imbalances in the short to medium run. In contrast, child dependency changes the magnitude of the long-run effect. Furthermore, the model comparison shows that to start from the same interest rate in the steady-state, parameters that determine the steady-state equilibrium interest rate have to be chosen differently across models with and without child dependency. This affects the magnitude of the transition dynamics of different models. These findings illustrate the importance of incorporating child dependency in studies that intend to explain the historical contribution of demographic changes to external imbalances and approaching studies that use models without child dependency for this purpose with caution.