Demographic Structure and the Real Exchange Rate: A Study Based on Cross-Country Data

5月 24, 2017

Sheng Bin (盛斌) and Chen Jingyu (陈镜宇)

Institute of International Economics, Nankai University, Tianjin, China

School of International Business, Tianjin Foreign Studies University, Tianjin, China

Abstract: By creating a two-sector intertemporal and intergenerational small open economy

model, this paper investigates how real exchange rate responds to demographic shifts in the

long term. The result shows that when the capital density of tradable goods sector exceeds that

of non-tradable goods sector in a country, an increase in the country’s elderly dependency rate

(ODR) will cause its real exchange rate to appreciate. In addition, higher savings rate or per

capita labor income means that real exchange rate is more responsive to ODR variations. We

conducted an econometric test on our theoretical hypotheses using the data of 214 countries

and regions during 1980-2013. Empirical result indicates that an increase of ODR will cause

real exchange rate to appreciate. This result is robust and unaffected by sample grouping

characteristics and differences. An increase in savings rate will significantly increase the

ODR elasticity of real exchange rate. This conclusion is also signiﬁcant and robust for overall

samples and categorized samples (except for developed countries) and generally consistent

with our theoretical hypothesis. However, our empirical research generally does not support the

hypothesis that higher labor income increases the responsiveness of real exchange rate to ODR.

This study is of great signiﬁcance to unravel the effect of China’s ageing population on the long-

term variations of renminbi’s exchange rate.

Keywords: elderly dependency rate (ODR), real exchange rate, elasticity, per capita

labor income, savings rate

JEL Classiﬁcation Code: R23, F31, D14