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Open Economy Neoclassical Growth Models and the Role of Life Expectancy

  • Tselmuun Tserenkhuu EMAIL logo und Stephen Kosempel
Veröffentlicht/Copyright: 11. August 2023
The B.E. Journal of Macroeconomics
Aus der Zeitschrift The B.E. Journal of Macroeconomics Band 23 Heft 2

Abstract

This paper 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, as most of the existing theoretical-quantitative literature that focus on the relationship assumes a closed economy. The model predicts that increased life expectancy has positive but diminishing marginal effect on long-run output per capita. We find that, between 1960 and 2018, improvements in average life expectancy at birth raised long-run output per capita in sub-Saharan Africa, the OECD region, and Canada by an estimated 57.49 %, 14.94 %, and 11.58 %, respectively. In addition, if average life expectancy at birth in sub-Saharan African countries converges from its current level to the level in their OECD counterparts, the region’s long-run output per capita will increase by an estimated 22.89 %.

Keywords: finite horizons; life expectancy; small open economy; speed of convergence
JEL Classification: O40; E10; F41; J11
Corresponding author: Tselmuun Tserenkhuu, Department of Economics & Finance, University of Guelph, Guelph, ON N1G 2W1, Canada, E-mail:

Appendix: Sensitivity Analysis

In the model, increased life expectancy makes an investment in human capital more profitable and thus encourages its accumulation. Under these conditions the elasticity of output with respect to human capital—η from the production function—will be quantitatively important. As mentioned in the model calibration (Section 4.1), values applied for η in the literature are typically in the range 1/3–2/3. In the main text we chose a value of 1/2 as our preferred estimate, and this was done for two reasons. First, η = 1/2 is at the midpoint of the range. Second, for η = 1/2 the model’s speed of convergence to the steady state is very close to the value of 2 % per year estimated from the empirical growth literature.

In this section, we test the sensitivity of some of our results using values of η near the end points of the range. Specifically, we compare the model’s predictions for how life expectancy and COVID-19 impact growth for η is a set of {1/3, 1/2, 3/5}. Note that η is kept below 2/3 to avoid having long-run growth become endogenous. Table 2 summarizes our results. The first row reports the speed of convergence implied by the model. The rows 3–6 show the percentage changes in long-run output due to changes in the average life expectancy at birth. In particular, we report the effects of the following changes in life expectancy in turn: change in the average life expectancy at birth in sub-Saharan African countries between 1960 and 2018; change in the average life expectancy at birth in sub-Saharan Africa if its average life expectancy at birth converges from its 2018 level to the level in their OECD counterparts; change in the average life expectancy at birth in the OECD countries between 1960 and 2018; and change in life expectancy at birth in Canada between 1960 and 2018.

Table 2:

Sensitivity analysis: Human capital share, η.

η
1/3 1/2 3/5
Speed of convergence (1/λ = 71) 4.53 % 1.81 % 0.65 %
Change in life expectancy % change in output
40–62 13.81 % 57.49 % 324.87 %
62–80 5.89 % 22.89 % 94.32 %
67–80 3.93 % 14.94 % 56.7 %
71–82 3.07 % 11.58 % 42.48 %

As can be seen from Table 2, compared to the case where η = 1/2, when η = 1/3, the speed of convergence for output per effective labor implied by the model jumps from 1.81 % to a counterfactually high value of 4.53 % per year. Moreover, the changes in life expectancy now lead to much smaller percentage changes in output. On the other hand, when η = 3/5, the speed of convergence for output plunges to a counterfactually low value of 0.65 % per year. Regarding the effects of changes in life expectancy, we can see that the percentage changes in output are now much higher in magnitude than they are for our preferred case of η = 1/2.

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Received: 2022-10-08
Accepted: 2023-07-28
Published Online: 2023-08-11

© 2023 Walter de Gruyter GmbH, Berlin/Boston

Artikel in diesem Heft

  1. Frontmatter
  2. Advances
  3. The Macroeconomic Impact of the 1918–19 Influenza Pandemic in Sweden
  4. Aggregate Costs of a Gender Gap in the Access to Business Resources
  5. The Macroeconomic Effects of Shadow Banking Panics
  6. Wealth Inequality and the Exploration of Novel Technologies
  7. Contributions
  8. Learning, Central Bank Conservatism, and Stock Price Dynamics
  9. Progressive Taxation and Robust Monetary Policy
  10. The New Keynesian Phillips Curve and Imperfect Exchange Rate Pass-Through
  11. The Macroeconomic Impact of Social Unrest
  12. Interest Rates, Money, and Fed Monetary Policy in a Markov-Switching Bayesian VAR
  13. Un-Incorporation and Conditional Misallocation: Firm-Level Evidence from Sri Lanka
  14. Idiosyncratic Shocks, Lumpy Investment and the Monetary Transmission Mechanism
  15. Open Economy Neoclassical Growth Models and the Role of Life Expectancy
https://doi.org/10.1515/bejm-2022-0163
Schlagwörter für diesen Artikel
finite horizons; life expectancy; small open economy; speed of convergence

Artikel in diesem Heft

  1. Frontmatter
  2. Advances
  3. The Macroeconomic Impact of the 1918–19 Influenza Pandemic in Sweden
  4. Aggregate Costs of a Gender Gap in the Access to Business Resources
  5. The Macroeconomic Effects of Shadow Banking Panics
  6. Wealth Inequality and the Exploration of Novel Technologies
  7. Contributions
  8. Learning, Central Bank Conservatism, and Stock Price Dynamics
  9. Progressive Taxation and Robust Monetary Policy
  10. The New Keynesian Phillips Curve and Imperfect Exchange Rate Pass-Through
  11. The Macroeconomic Impact of Social Unrest
  12. Interest Rates, Money, and Fed Monetary Policy in a Markov-Switching Bayesian VAR
  13. Un-Incorporation and Conditional Misallocation: Firm-Level Evidence from Sri Lanka
  14. Idiosyncratic Shocks, Lumpy Investment and the Monetary Transmission Mechanism
  15. Open Economy Neoclassical Growth Models and the Role of Life Expectancy
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