Air pollution, demographic structure, and the current account: an extended life-cycle model

Air pollution has an important impact on both human health and sustainable economic development. The relationship of the current account, which is an important carrier of international economic activity, with air pollution has rarely been discussed by scholars. This paper aims to investigate how air pollution affects the current account and the mechanism of this effect. We conducted a theoretical analysis of the relationship between air pollution and the current account by adopting an extended form of the life-cycle model. Then, we used panel data (2000-2017) from 159 countries and the panel double fixed-effect method to empirically test the theoretical outcomes. We found that an increase in the degree of air pollution in a country leads to the deterioration of the domestic current account. In addition, air pollution changes the current account by affecting the demographic structure, following the "air pollution→demographic structure→current account" mechanism. The study also tested the robustness of the benchmark results by solving endogeneity problems, subsample regression and controlling measurement errors. Our findings are an important expansion and innovation for the research about the current account and have important implications for external economic equilibrium and sustainable economic development.