Age Structure and the Real Exchange Rate

20/12/2000 |  Braude Jacob
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The Foreign Exchange Market

Age Structure and the Real Exchange Rate
Jacob Braude

Abstract

This paper reports an empirical finding on the relation between the age structure of economies and their real exchange rate. The relation varies with the level of development. Among developed countries a 10 percentage point higher ratio of old people to the working age population is associated with a 12-15 percent higher price level. In middle income developing economies, a 10 percentage point increase in the ratio of children to the working age population is related to a 4 percent increase in the price level. The real exchange rate reflects the relative price of nontradables. A simple model attributes the findings to the effect of the age groups on the demand for nontradables. Its calibration indicates that the suggested explanation can account for a substantial part of the observed effect of the elderly. It is also consistent with the finding that the impact of children is much smaller. The fact that the significance of the elderly is limited to developed countries further supports the argument.


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1I thank Jenny Kogan for efficient research assistance, and Y.Djivre, A. Offenbacher, Z. Urbach and H. Barkai
 for their comments.