| Abstract | Persistent global current account imbalance increasingly attracts attention from academia, business and policy makers. Several explanations are provided, including financial development (Caballoro, Farhi, and Gourinchas, 2008), sexratio ratio (Du and Wei, 2010) and trade liberalization (Ju, Shi and Wei, 2011). However, demographic structure, a well-known and possibly more fundamental reason, is ignored by recent literature. In this paper, based on a panel data analysis on a sample of 165 countries from 2005 to 2012, we identify the causal relationship between dependent ratio and current account surplus. The main contribution and innovation of our research is utilizing WWII as an instrumental variable to tackle the endogeneity problem of demographic structure in previous studies. Contrary to most recent literatures, we find that dependent ratio has a positive effect on current account surplus. This effect is even magnified both quantitatively and significantly after the introduction of instrumental variable. We further find that increased dependent ratio enhances the motivation of precautionary saving, which offsets the effect of life-cycle theory, thereby rendering the effect of dependent ratio on saving rates insignificant. Besides, by decreasing the return rate of investment as the result of scarcer labor force supply, and by hampering social entrepreneurship, heighted dependent ratio significantly decreases investment ratio of a society. |