The Global Saving Glut in the light of demographic developments : a numerical simulation of the developments in China and the US

Abstract

The objective of this thesis is to predict how demographic developments will affect the Global Saving Glut. The thesis examines how the changes in the age structure in China and the US are affecting their respective aggregate savings rates. Ben Bernanke was the first economist to mention the term Global Saving Glut, which describes an economy where desired saving exceeds desired investment. He states that the increase in the global supply of savings was one of the main reasons behind the low global real interest rates. This thesis will use an Overlapping Generation Model with seven generations overlapping in the time period from 2010 to 2060. By including numerous generations, this will provide an improved analysis and understanding of the demographic patterns and developments in both countries. In the US, the model will include the effect of the aging of the baby boomers, while in China the model will capture the long run effects of the family planning policies. From our analysis, we see an increasing number of elderly per worker in both China and the US. In line with the Life-Cycle Hypothesis, our results, therefore, project a decrease in both countries’ savings rates since more people are in the dissaving stages of their life-cycle. Also, with fewer workers per elderly, taxes will need to increase to keep the two nations’ pension systems in their current forms. In order to dampen the effects of the increase in the old-age dependency ratios, a solution can also be to increase the retirement age. Since China and the US are the two largest economies in the world, the developments in their savings rate will have large implications for the global economy and the global real interest rate. A large reduction in aggregate saving, and thereby in their current account balances, will lower the global supply of saving. As a result, these developments might increase the low global real interest rates we have been seeing over a longer period of time.