Demography , Capital Flows and International Portfolio Choice over the Life - cycle ∗

In an aging world, how does a country’s demographic structure impact external positions in safe and risky assets and their respective prices? We answer these questions combining endogenous portfolio choice over the life-cycle with a two-region, general equilibrium model. We show that when one region is aging faster than the other, its demand for both safe and risky assets increases, whereas a greater portfolio share is allocated into safe assets. Absent perfectly elastic supply, this results in a change in autarky rates and, in an open economy, in international asset trades. Calibrating the model to the U.S. and the EU, a negative net external position emerges in safe assets in the U.S. vis-à-vis the EU, explaining a significant portion of observed bilateral positions. Further, we predict persistent bilateral positions throughout the demographic transition. The model allows to quantitatively assess the impact of demographic change on trade in different types of assets, whereas previously, the focus has been on aggregate capital flows. JEL Classification Numbers: G11, G15, J11, F37, F41