Population ageing, capital mobility and optimal saving

This paper reports simulations of the effect of fertility on optimal saving and consumption under three assumptions about capital mobility: zero, perfect and imperfect. The case of imperfect capital mobility is modeled by expressing the interest rate as a function of the level of foreign liabilities. Simulations show that even a small degree of responsiveness of the interest rate to the level of foreign liabilities is sufficient to generate optimal paths of consumption and saving that are very close to the paths for a closed economy. The results of the simulations suggest that, with an exogenous rate of technical progress, the effect of a lower fertility rate on social welfare is not likely to be significantly welfare-reducing.