Black holes and Revelations - Demography and the Net International Investment Position

Abstract: This purpose of this paper is to explain the long and short run development of the Net International Investment Position (NIIP) using age structure data. Following the financial globalization, the development of the NIIP has diverged from the path of accumulated current account flows. A subsequent consequence is that despite sustained current account surpluses, NIIPs of small developed countries remain small or negative. The situations are referred to as so-called “black holes”. The reason for this development seems to be valuation which has gained importance for the determination of the NIIP at the expense of the current account. Valuation consists of (i) asset prices and (ii) real exchange rates. In this paper, demography is argued to be a determinant of assets prices, real exchange rates and the current account and hence an underlying factor with negative effects on the NIIP. Contrary to theory and previous research this paper finds a positive long-run relationship between the NIIP and population ageing in small developed countries and non-OECD countries. An annual adjustment mechanism of 12 percent is identified for small developed countries and of 27 percent for non-OECD countries.