Journal of Financial Economics

REF 122 Demography and finance

Relying on the United Nations demographic forecasts this articles aims at identifying the world key demographic trends and their economic consequences. Three factors are the determinants of the present demographic evolutions: the demographic structure, the decline of the fertility rate and the population ageing. The differences and convergences at work have significant macroeconomic consequences through the dependency of the inactive part of the population towards the wealth produced by the active one. They should in particular change the international macroeconomic balance through a reduction of the world current accounts imbalances from their highest 1990 and 2000 level. It will induce a greater responsibility of national economic policies in the evolution of these imbalances.

Relations between demography and economics are complex. Studied from the beginning by economists (Petty, Malthus), demography has not evolved as a branch of economics. During the 19th and the beginning of the 20th century demography has been deeply influenced by biology and culture. Nevertheless by the mid-20th century, demography returned to the social sciences thereby facilitating the analysis of its links with economics (Sauvy, Fourastié, Becker). Today, demographic studies lean on cultural anthropology and economics as shown in this article through several cases. Finally these two disciplines appear to be complementary, the first one being focused on the long term and the other one on the short term, in particular as regards financial aspects.

The rise of longevity since 1840 is remarkable. In France, life expectancy doubled from 40 in 1840 to 82 today. Analysis of the nature of this increase, including the improvements in survival at older ages, sheds new light on the economic, social and health transformations of the past two centuries. The future of longevity may be as remarkable as the past. Demographers, actuaries, gerontologists and other experts on mortality disagree widely about whether life expectancy is approaching a looming limit or will continue to increase at least as rapidly as in the past. Better methods of forecasting are needed to anticipate coming economic, social and health changes.

The reversal of the fertility trend, also called “fertility-rebound”, that comes along with the process of economic development in some but not in all developed countries shows that the impact of economic development on fertility is ambiguous. Whether this impact is positive or negative depends on many factors, over and above the economic dimension. As fertility affects population growth and the age structure of the population, changes in fertility in the immediate future have far-reaching consequences on economic development, productivity growth and aspects of welfare systems. It is therefore of major political, social and economic interest to know whether further economic advancement is likely to provoke a rebound of fertility in highly developed countries.

This article sheds light on the potential drivers of fertility in highly developed countries. By establishing a state of the art of the empirical literature on this subject, the article answers the question if and under what circumstances the phenomenon of a “fertility rebound” is likely to become a stylized fact in developed countries in the near future.

This paper synthetizes the recent literature on the links between international migration and international financial flows (Foreign Direct Investment and cross-border flows of financial assets and bank loans). The two main conclusions are as follows. First, international migration reduces bilateral transaction costs and information imperfections, thereby facilitating FDI and other financial flows from migrants' host to home countries. Second, skilled migrants – who are more likely to hold information that is relevant to foreign investors and also more likely to take part in international business networks – play an essential role in this process. Overall, international migration appears to promote the integration of home countries (especially of developing countries) into the global financial economy and contributes to reduce the home-bias that characterizes the structure of financial investments in industrialized countries.

Low fertility and longer life lead to population ageing and slower or declining population growth. While slower demographic growth reduces the need for saving, the ageing population imposes old age dependency costs which are particularly heavy for the public sector. Is fertility too low? The National Transfer Accounts project (NTA) provides data to quantify dependency costs. Given current age profiles of taxes and benefits, for rich and upper middle income countries about three births per woman would maximize the fiscal support ratio. But inclusive age profiles of consumption and labor income are more relevant for living standards, and the corresponding support ratios are maximized by fertility just above two births per woman. Going a step further and taking reduced saving into account, 1.5 birth per woman for upper middle income countries, and 1.8 birth per woman in rich industrial nations, would maximize living standards. In open economies these results would be slightly different. Consideration of human capital would also change results somewhat.

The demographico-economic “paradox” suggests that the decline of fertility would be a natural consequence of economic progress. The simultaneity of economic and demographic evolutions raises questions about the causality relation binding population and economic growth. In this research area, the theorists developed models of unified growth highlighting the importance of the parental arbitration between the desired number of children and their “quality” in the transition towards steady-state economic growth. The literature on fertility dynamics remains nevertheless divided between the partisans of the adaptation to rational choices and those in favor of the part played by dissemination of culture and norms. Taken separately one from the other, none of these approaches makes it possible to provide relevant and reliable explanations of the interaction between economic and demographic development. Our research, in extension of these investigations, explores the mechanisms subjacent with the economic and demographic evolutions through the prism of the equality relations between men and women.

Defined benefit pension funds bear important longevity risks, of which the main one is trend risk. This risk is linked to higher than expected increase of life expectancies of pensioners. This increase has always been underestimated for decades, leading to current underfunding of pension liabilities and important hedging need that the insurance industry capacity cannot address alone. Hence the need of solutions from the financial market which would bring on top of capacity, a better transparency on mortality level expectation.

The huge economic significance of longevity risk for corporations, governments and individuals has begun to be recognized and quantified. By virtue of its size and prevalence, longevity risk is the most significant life-related risk exposure in financial terms and poses a potential threat to the whole system of retirement income provision. This paper reviews the birth and development of the Life Market, the market related to the transfer of longevity and mortality risks. We note that the emergence of a traded market in longevity-linked capital market instruments would act as a catalyst to help facilitate the development of annuity markets both in the developed and the developing world and protect the long-term viability of retirement income provision globally.

In this article, the asset meltdown hypothesis, which anticipates a sharp fall in asset prices caused by the transition to retirement of large cohorts of the baby boom, is discussed. First, the correlation between financial and demographic variables is presented and the main theoretical arguments that support the hypothesis are developed. Second, it is shown that these arguments hardly resist a further analysis. In particular, the overall effects of the transition to retirement of the baby boomers on savings and market prices suggest that 1/total household savings should not decrease in the next years; 2/the link between demographic variables and market prices is difficult to establish. If the asset meltdown hypothesis does not seem robust, introducing demographic variables nevertheless help to better understand of the dynamics of financial variables.

This paper analyzes the evolution of the global inequality of living standards and raises the question of whether the fall in inequality observed in the last two or three decades, largely because of the fall in the inequality between countries, could stop or reverse in the future due to the opposite evolution of the within country inequality. This dualist evolution of the global inequality of standards of living is compared to that of the inequality of health, as approximated by life duration. There too, global inequality is falling but this is due mostly to the within country inequality, whereas between country inequality plays a negligible role.

The lengthening of life expectancy, especially at older ages since the mid-1970s, implies that the longevity risk is growing again with more uncertain pensions in the future and increasing costs of health and long-term care. This unprecedented change advocates for the development of life products purchased in retirement (annuity, ‘viager', reverse mortgage), which have a limited diffusion today. The proposed solutions involve renovated forms of these products – annuity or housing-based credit contracted on a fixed term, “pooled viager” or viage, long-term care reverse mortgage –, whose development would be further stimulated by an original reform of inheritance taxation. The intervention of the State to regulate these markets is essential, which requires particularly a codification of mortality tables and a specific protection of modest categories.

This paper examines the differences in wealth ownership between immigrant and native households in France. Using data from the 2009-2010 wealth survey conducted by Insee, we find that the sociodemographic and economic characteristics of immigrant households explain a large part of the observed ownership gap. After controlling for characteristics, we find that immigrants are as likely as natives to own financial and real estate wealth, except for saving accounts. They have a lower rate of ownership. The specific factors of the immigrant population such as region of origin, legal status and the duration of residence have significant effects on wealth and contribute to explain the observed gaps.

Since the 1970, savings amounts transferred by migrants to their home countries have constantly increased. They now represent twice the amount of foreign aid and are greater than FDI in developing countries (except BRICs). This article deals with the migrants savings transfers, their determinants, their macroeconomic effects on growth and their microeconomic effects on poverty, inequality and education in the migrants home countries. If no clear conclusion can be drawn on the macroeconomic consequences, microeconomic consequences appear to be truly positive. The migrants decision to return or not to their home countries is also a key factor. But as these transfers induce significant economic issues, they still don't play a major role in the economic policy debates in home countries.

Crowdfunding has been initially presented as an alternative model to fund risky projects from the crowd. The authors study the recent evolution of regulation and the development of multiple partnerships between banks and platforms that lead to a re-financialization of the initial model. The authors show that the development of crowdfunding does not lead to a disintermediation movement but, on the contrary, it generalizes market intermediation by offering a financial market tool adapted to private equity.

The understanding of economic and financial mechanisms related to coverage needs thanks to private long term care insurance products, has now become a concern for the area of sector of bank and insurance. This concern is reinforced by the current questions about the evolution of public pension system and public long-term care. Banks and distributors must therefore identify the expectations and motivations of their different customer profiles to help further develop this high-potential market. This paper attempts to address this concern through a study which breaks down into two parts: a preliminary and descriptive component based on the exploratory analysis of a national banking portfolio, then a second economic and financial aspect to surmise the key mechanisms about insurance choices and effective coverages associated with these insurance products, accompanying themselves to a comparison with the different works on sub - European and American samples.