China's Exchange Rate Policy, The Aging Process

The implementation of China's family planning policy after 1980s has brought the "demographic dividend" to China, leading to higher saving rate and abundant labor force. However, the demographic dividend period will end up in 2030s and China will face severe problem in economy aggregate, structure and external balance caused by rapid aging in 21st century. This thesis employs the economics theory and tools to characterize the leverage effect of exchange rate and plans out the exchange rate strategy and path of China, aiming to faciliate the long-term economic growth, improve the economy structure and support the external balance in the 21st century.After reviewing existing researches and stylized facts at home and abroad, this thesis develops a demography economics model with exchange rate leverage as the workhorse, which combines the open macroeconomics and demography economics together. Exchange rate leverage model not only makes the demography economics model open, which reflects the international payments and external assets, but also introduces fine overlapping generation economy features into the oepn macroeconomics model, which reflects the difference of labor supply, consumption and saving of people of different ages. Furthermore, the model also includes the micromechanism of the exchange rate leverage, and portrays the influence of exchange rate on intermediate objectives such as prices and interest rate, and the influence on the ultimate objectives such as aggregate, structures and external balance. This article uses statistics and econometrics to calibrate the parameters and initial value of the model.In this paper, a simplified version of the exchange rate leverage model is used to predict the economic outcome of aging in the 21st century, without considering the exchange rate policy. In the process of aging, China will suffer a significant decrease of economy growth rate. The consumption rate will rise and the investment rate will fallotal. For the external balance, the current rapid accumulation of foreign assets will turn reversal, leading to a high level of external debt after 2050s.In order to solve the aging problems, this thesis uses the leverage model to simulate the different effect of once-for-all and continuous change of RMB exchange rate. The findings are that exchange rate policies is most effective in keeping external balance, less effective in economic restructuring and least effective in improving the aggregate. The effect of exchange rate policy is path dependent. This thesis employs the computer solving techonology to get the optimal exchange rate path between 2010 and 2070, both generally and specifically. In general interest, the RMB should appreciate before 2030s to improve the welfare of residents in the near future, and depreciate after 2030s to keep external balance at the cost of welfare. General optimization of the exchange rate conflicts with some specific group of people, particularly those young ones in the late 21st century. By comparing exchange rate policy schemes, we find that the effect of exchange rate policy varies with the timing and scale, especially the excessive appreciation leads to an unreeemable external imbalance called "devaluation trap".The long-term exchange rate policy proposed by this thesis is to appreciate before 2030s and to depreciate afte then. There should be a smooth transitiion between the mid-tem and short-term appreciation trend. With regard to optimal assignment rules, the policy maker can use the exchange rate to achieve external balance when designing policy coordination.