External Asset Positions, Demography, and Life Cycle Portfolio Choice
How do demographic differences between regions affect external positions in safe and risky assets? We answer this question focusing on the US vis-à-vis 15 European countries. The US bilateral position is characterized by risky assets alongside safe liabilities. At the same time, the US population is relatively younger. We present a structural general equilibrium model of life-cycle portfolio choice with two regions, which differ by the age structure of their populations. We show that the younger region has a higher relative demand for risky assets, inducing international asset trades. In a simulation starting in 1990, we replicate the observed positions between the US and the European countries and predict the risk asymmetry to persist until the end of the century. Demographic aging also accounts for about one-fifth of the observed decline in the real interest rate observed in the data from 1990 to 2020. In a decomposition exercise, we show that the decline in the share of workers in the economy and increasing longevity produce the strongest demographic drivers of households' financial decisions.
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