Long-Term Capital Movements



27

Appendix

Our demographic specification follows Fair and Dominguez (1991) and Higgins (1998). We divide
the population into
J = 12 age cohorts and the age variables enter the net foreign assets equation as

Σ12                       .                .                                                    12

j=1ajPjt where pjt is the population share of cohort j in period t and j. = αj = O. We make
the restriction that the coefficients lie along a cubic polynomial

•               ∙2               ∙3

α j = Yθ + Y1 j + Y2 j + Y3 j

The zero-sum restriction on the coefficients implies that

Yo =-Y,(1∕ J )∑'^=J - Y2(1/J )∑∑ j2 - γ3(1∕ J )j=1 j3

In turn, we can estimate Y1, Y2, Y3 by introducing the age variables into the estimated equation in the
following way

Y1DEM11 + Y2 DEM 21 + Y3 DEM31

where

dem1t = ∑ .∙ iP, - (1/J )j=1 j ^p

dem22 t = ∑j=1 j2 P,, - (1/ J )1,2=1 j2 j=1 Pt

DEM3. =j=1 j3 Pt - (1 / J )j=1 j3 j=1 Pt

Finally, we can easily recover the implicit αj once we know Yo, Y1, Y2, Y3.



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