10
evidence that demographic factors are an important driving force of medium-term current account
behavior. Herbertsson and Zoega (1999) focus in particular on the link between population age
structure and public and private saving behavior: they highlight how countries with high youth
dependency ratios tend to have larger current account deficits.10 Employing a demographic
specification similar to ours, Taylor (1994) and Higgins (1998) show that the demographic structure
is quantitatively important in explaining medium-term current account behavior.
3.3 EMPIRICAL ANALYSIS
Our empirical analysis of the long-run behavior of net foreign assets uses data for 66 countries
spanning the period 1970-1998. Throughout our empirical work, we split the sample between
‘industrial’ and ‘developing’ countries.11 The industrial countries consist of long-standing members
of the OECD, which approximately corresponds to the most-developed set of countries at the start of
the sample period. We allow for potentially different relations between our fundamentals and net
foreign asset positions for the two groups, as well as for differences in data quality. For instance, we
have already noted that the output per capita may exert different effects in both groups and the
difference in life expectancy and in retirement patterns means that demographic effects plausibly will
also differ across the two samples. Furthermore, differences in the pervasiveness of liquidity
constraints and other sources of violation from Ricardian equivalence may induce differences in the
relation between net foreign assets and public debt in the two groups.
We use the following variables: net foreign assets as a ratio of GDP (CUMCA and CUMFL
measures, as well as the IIP measure for robustness checks), GDP per capita in 1995 US dollars (in
10 However, Chinn and Prasad (2000) find instead only weak evidence of a systematic impact of dependency
ratios on current account balances in a wide sample of industrial and developing countries.
11 ‘Industrial’ countries include the United States, United Kingdom, Austria, Belgium-Luxembourg, Denmark,
France, Germany, Italy, Netherlands, Norway, Sweden, Switzerland, Canada, Japan, Finland, Greece, Iceland,
Ireland, Portugal, Spain, Australia and New Zealand. ‘Developing’ countries are Turkey, South Africa,
Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador,
Guatemala, Mexico, Panama, Paraguay, Peru, Uruguay, Venezuela, Jamaica, Trinidad and Tobago, Israel,
Jordan, Kuwait, Oman, Saudi Arabia, Syrian Republic, Egypt, Sri Lanka, Taiwan, India, Indonesia, Korea,
Malaysia, Pakistan, Philippines, Singapore, Thailand, Algeria, Botswana, Côte d'Ivoire, Mauritius, Morocco,
Zimbabwe, Tunisia, and China.