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=₁^ajPj_t where p_jt is the population share of cohort j in period t and ∑ j. = α_j = 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 α_j once we know Y_o, Y₁, Y₂, Y₃.

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