Warwick J McKibbin Centre for Applied Macroeconomic Analysis Crawford School of Public Policy ANU Presentation prepared for a seminar at ANU on 13 October 2017 ARC Centre of Excellence in Population Ageing Research II ID: 1027260
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1. 1Modeling the Global Impacts of the Demographic Transition in Asia Warwick J McKibbinCentre for Applied Macroeconomic Analysis, Crawford School of Public Policy , ANU;Presentation prepared for a seminar at ANU on 13 October 2017
2. ARC Centre of Excellence in Population Ageing Research II
3. Countries with over 20% of population aged 65+2010:The Issue
4. Countries with over 20% of population aged 65+2050:The Issue
5. ChallengesResearch programInvestigatorsImpact1.1 Demographic projection models1.2 Demographic change & optimal policy1.3 Regional macro-modelling1.4 National transfer accounts 2.1 Differences in financial & health decision making: impacts on productive ageing2.2 Individual & social influences on decisions2.3 Expectations & the ageing experience 2.4 Rational choice theory and consumers 1. Macro-demographic dynamics2. Decision making, expectations & cognition4. Sustainable wellbeing in later life3.1 Mature workers in organisations survey 3.2 Promoting successful ageing at work 3.3 Promoting successful teams & orgs 3.4 Promoting effective care outside work 4.1 Mortality & morbidity risk 4.2 Macro-health outcome simulations 4.3 Social determinants of successful ageing 4.4 Retirement policy issues 4.5 Financial & insurance product design 4.6 Guiding financial decision making 3. Organisations & the mature workforceLinkages &Research translationGovernance LeadershipMentoringPartnerships
6. Australian universities $32.9m UNSWANUUWASydneyMelbournePartnershipsGovernance LeadershipMentoringResearch programInvestigatorsImpactChallengesLinkages &Research translation (figures rounded)ARC $28.4mTotal cash and in-kind support$70mPublic sector$4.5mNSW TreasuryAustralian TreasuryDSSDoHDFATRBA Safe WorkWorld Bank AHRCNSW Govt. (RAAP)Private sector $2.7mWillis Towers Watson MedibankMLC PWCInternational unis$0.9mWhartonManchesterPennsylvania
7. NATIONAL: ANUChief InvestigatorsAssociate InvestigatorsOther AffiliationsResearch programInvestigatorsLinkages &Research translationImpactChallengesGovernance LeadershipMentoringPartnershipsUniSAUWAU NewcastleUNSWUTSU SydQUTMonashLa TrobeMelbourneU Adelaide
8. PennsylvaniaWhartonPortland StateFrisch CentreUSC/UCLAHarvardBerkeleyIllinoisWisconsinRANDColumbiaFloridaKentLSEOxfordExeterNLD BankUCL/IFSNetsparParmaTriesteSt GallenCESIfoStanfordWorld BankNihonTokyoKeioCASSPekingZhejiangHKUSTNUSU of IndonesiaU of MalayaINTERNATIONAL:PIs & AIs, ISAC, OtherResearch programInvestigatorsImpactChallengesLinkages &Research translationGovernance LeadershipMentoringPartnerships
9. 9OverviewSummary of Global Demographic trendsGoal of the ProjectMacroeconomic issuesProposed model DevelopmentConclusions
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11. GoalExtend the G-Cubed model to explore different demographic scenarios for Asian economiesFocus on the macroeconomic adjustment globally, in the region and in AustraliaGrowth, trade, balance of payments, financial markets
12. Period of Research27 September 2017 to end 2023
13. 13Macroeconomic Impacts of Changing Demographics Aggregate saving, consumption, wealthAggregate consumption changes due to changes in wealthComposition of consumption bundles due to income growthComposition of consumption bundles due to age of consumersInvestment ratesaggregateacross sectorsLabor marketsGovernment budgets=> General equilibrium impacts on trade and financial flows and asset prices including real exchange rates
14. 14Macroeconomic ImpactsWhat happens to global and national interest rates depends on savings relative to investmentA rise in savings relative to investment will tend to lower real interest ratesA fall in savings larger than a fall in investment will tend to raise real intertest rates
15. 15Macroeconomic ImpactsWhat happens to the current account of any country depends on the impact on savings relative to investmentA rise in savings relative to investment will tend to improve the current accountA fall in savings larger than a fall in investment will tend to worsen the current account
16. Model strategyTake demographic change as exogenousDevelop 6 sector models for major countries in the Asia Pacific as part of the G-Cubed modelFollow the theoretical approach to demographics which approximates an OLG framework (Yaari/Blanchard/Faruquee/Bryant/McKibbin)Develop the model initially using the same age earnings profile in each country but actual demographic changesImplement different demographic scenarios
17. Model strategyOnce the core system is workingChange the utility function in G-Cubed to a Linear Expenditure System (allows for non unitary income elasticities)Estimate LES for the USEstimate LES for countries where possible
18. Model strategyDisaggregate sectors to allow wider consumption choiceHealth services
19. Model strategyAllow for age dependent consumption
20. Model strategyIntroduce pension systems and retirement decisions
21. Possible ExtensionsFull OLG modelEndogenous demographyCurrently working separately on the impact of technology and artificial intelligence
22. The G-Cubed ModelMcKibbin W. and P. Wilcoxen (2013), “A Global Approach to Energy and the Environment: The G-cubed Model” Handbook of CGE Modeling, Chapter 17, North Holland.McKibbin W. and P. Wilcoxen (1999) “The Theoretical and Empirical Structure of the G-Cubed Model” Economic Modelling , 16. 22
23. G-Cubed ModelDeveloped in 1991 by McKibbin and Wilcoxen drawing on Mckibbin & Sachs and Jorgenson & Wilcoxen models.Hybrid of macro models (dynamic stochastic general equilibrium model) and a computable general equilibrium modelsAnnual frequency with detailed macroeconomic and sectoral dynamics
24. G-Cubed ModelAllows for inter-industry input-output linkages, capital movements, and consumption and investment dynamics.Extensive econometric estimation of key consumption and production substitution elasticities24
25. Countries and Sectors (G-cubed, v. F) Countries (18)United States MalaysiaJapan PhilippinesEurope ThailandAustralia VietnamKorea Other AsiaRest of Advanced Economies Latin AmericaChina Rest of WorldIndia Europe and former Soviet UnionIndonesia Oil-exporting and the Middle EastSectors Energy Mining Agriculture Durable Manufacturing Non-Durable Manufacturing Services
26. 26Theoretical ApproachFollows Yaari/Blanchard/Weil models as extended by Faruqee, Laxton, Bryant, McKibbin and othersDemographics from the “bottom up”Approximate an OLG model using a probability of death and exogenous profiles of birth and death rates to generate cohort adjustment over timeThe demographic change is taken as exogenous and cohort aggregation effects are calculated outside the core model
27. 27Minimum RequirementsAdults are distinguished from children so we can capture the importance of changes in the youth dependency ratioCountry specific models for the major countries/regions so we can capture the asymmetries
28. 28ChildrenAre born to adults and stay children for 16 yearsDo not supply labourDo not hold financial wealthReceive transfers from adults (which grow at the rate of economy wide productivity growth) which they consumeHave a different birth rate (defined as the number of children as a percent of the adult population) than the adult maturity rate (defined as the number of new adults as a percent of the adult population)Have a different mortality rate than adults
29. 29Adults/workersEmerge at age 17 from the pool of childrenThe adult maturity rate is the rate of emergence of adults as a percent of the total adult populationAre born with the productivity of the cohort alive in time t and then acquire productivity based on the estimate age earnings profiles over time.Die at a constant rate over time (major shortcoming but needed for aggregation).
30. 30Introduce empirical age earnings profilesLabor income rises with age and experiencereaches a peak in late middle agethen declines gradually for the rest of life The shape of the age-earnings profile for individuals in the economy is assumed to be the same for all individuals and unchanged through time.
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32. 32Introduce empirical age earnings profilesBut the demographic composition of the population can change over time. Because aggregate labor income is obtained by aggregating over individuals that differ in age and experience, moreover, the bottom-up aggregation over individuals permits the demographic changes to influence both the aggregate level and the age distribution of labor income.
33. 33Introduce empirical age earnings profilesThe hump-shaped profile of earnings by age influences both the supply side and the demand side of the model economy's behavior. Hence through these life-cycle effects, changes in demographics significantly influence macroeconomic outcomes.
34. 34Supply side effectsOn the supply side, the earnings profile is an indicator of the changes in a cohort's relative productivity and its supply of labor over its lifetime.The marginal product of capital will change and investment will respond
35. 35Demand Side On the demand side, the anticipated path of labor income determines the saving plans of consumers over their lifetimes.Changes in investment will change the demand the goods.
36. ConsumptionResponds to income, employment and relative price changes from the supply sideNeed to allow for changes in consumption patterns due to changes in income levels and changes in age.
37. SummaryMany different aspects of Aging will be added sequentially over the next 7 years with the plan to have useful policy implications and a framework for alternative scenarios as the project proceeds
38. 38Background Websiteswww.sensiblepolicy.comwww.gcubed.com