Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2001:11: The Impact of Demography on the Real Exchange Rate

Andreas Andersson and Pär Österholm ()
Additional contact information
Andreas Andersson: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Pär Österholm: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: Theory predicts that life cycle saving mechanisms will cause real exchange rate variations as the age structure varies. We investigate the impact of demography on the Swedish real exchange rate, measured as the real TCW index, during 1960 to 2000. Time series regressions show that the Swedish demographic structure has significant explanatory power on the real exchange rate. A model using age shares alone as regressors is used for medium term out-of-sample forecasts, outperforming both a naive forecast and forecasts based on an autoregressive model. Finally we use the estimated model in order to make forecasts of the Swedish real exchange rate up to 2015. The model predicts that the Swedish age structure will have a depreciating effect on the real exchange rate up to 2007 followed by an appreciating effect in the end of the forecasting period.

Keywords: Demography; Real exchange rate; Forecasts

JEL-codes: F31; F41; J10; J11

37 pages, March 15, 2001

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