Life expectancy and economic outcomes in a small open economy

Tserenkhuu, Tselmuun
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University of Guelph

Chapter 1 applies the Ramsey-Cass-Koopmans (RCK) growth model to an open economy so that, when calibrated with standard parameter values that are commonly used in the small open economy macroeconomic literature, the time paths of the model variables and the speeds of convergence implied by the model conform with empirical evidence. Open-economy versions of the RCK growth model lead to several counterfactual conclusions including: infinite speeds of convergence for physical capital and output; and unbalanced consumption and asset growth. We avoid these undesired results by extending the baseline model with human capital, international credit constraints, and finite horizons. Given its finite-horizons feature, our model allows us to study the growth implications of changes in life expectancy from the perspective of an open economy. We find that increased life expectancy has positive but diminishing marginal effect on long-run output per effective labor. Using our model, we quantify the contribution of life expectancy to the long-run economic performance of Canada, sub-Saharan Africa, and the OECD member countries over the past six decades. Our quantitative results from Chapter 1 suggest that life expectancy has a substantial impact on the steady state values of the key macroeconomic variables. The second chapter builds on the first by further exploring the business cycle implications of life expectancy in a small open economy setting. Using our framework, we quantify how changes in life expectancy have impacted Canadian business cycle fluctuations over the past forty years. Further, we evaluate how the cyclical volatility of the main aggregate variables may change if the average life expectancy at birth in sub-Saharan African region catches up with its OECD counterparts. Using panel data of 71 countries for the period 1991-2015, Chapter 3 examines how population aging affects the marginal effects of the factors that determine growth. Sub-sample comparisons between the OECD member countries and low and lower-middle income countries are also performed. The analysis is based on a fixed effects panel data varying coefficient model. I estimate the model by a consistent estimator, proposed in the literature, that removes fixed effects using kernel-based weights.

Life expectancy, Small open economy, Economic growth, Business cycles, Population aging