Summary:
When the speed of population aging differs across countries, capital will in theory flow from fast-aging to slow-aging countries. Aggregate impacts of such aging differentials are little known. I investigate aggregate welfare and production impacts with a multi-country overlapping-generations model calibrated for 14 European countries. If capital can flow across borders due to aging differentials, I find welfare losses in some countries and welfare gains in other countries, compared to the case where borders are closed but aging differentials the same. As gains dominate losses, there are aggregate welfare gains. Households gain on average the equivalent of 0.8% of lifetime consumption in fully integrated capital markets, with capital flowing across borders, compared to separated markets. Lifetime consumption would incease by 5% in some countries but decline by 2% in other countries. Aggregate production would be smaller, with a yearly average drop of per capita GDP of 0.5 percentage points. Cross-country differences savings behaviors are key to the results. As life expectancy increase, households in more patient countries increase savings more to maintain consumption after retirement. When capital markets are closed, interest rates drop much in these countries. With integrated capital markets, these households could increase returns on savings by shifting investments to other countries, generating large welfare gains.
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