Demographics and Current Account Imbalances: Accounting for the Full Age Distribution

2022 Update of the External Balance Assessment Methodology

“…As described in Section III.B, three demographics variables constructed with specific age groups proxy for the saving rate of the young, prime aged, and old (population growth, the share of prime age savers and the old age dependency ratio, respectively). A recent study by Koomen and Wicht (2022) suggests using the full information of the population age structure (rather than specific groups) to understand how demographic differences across countries can affect the current account. Since this approach could potentially involve estimating a large set of parameters, the effects across age groups are approximated with a third-order polynomial, as proposed by Fair and Dominguez (1991).…”