A Research Of Effectiveness Of China’s Monetary Policy Under The Aging Background

Due to the implementation of a strict family planning policy, China isexperiencing a rapid Demographic Shift. It will have a broad and far-reaching socialand economic impact. In2004, Zhou Xiaochuan, governor of the People’s Bank ofChina, attended the "Chinese monetary policy transmission mechanism SeniorSeminar" jointly sponsored by the People’s Bank of China and the IMF. He pointedout,"In the study of monetary policy transmission mechanism, we should concernabout the aging population and the impact of the social security system for the effectof monetary policy ", clearly illustrating that demographic shift’s impact on theeffectiveness of monetary policy is a problem that worthy of study.Now, there have been a lot of research about demographic shift’s impacts onconsumption, savings, economic growth and so on, and demographic shift will have aprofound impact on the economy is the consensus. As a frontier of aging economics,there is little research on demographic shift’s impact on the effectiveness of monetarypolicy in foreign countries, and the research concentrated on developed countries.Compared to foreign countries, China has even little research on this topic, andresearch on the path to explain how aging impact the effectiveness of monetary policyand empirical test is blank.From the perspective of monetary policy transmission channels, this paperclarify the path of how population aging to impact the effectiveness of monetarypolicy. This paper introduces the aging of the population variables into Karras’sincome growth and inflation model, and constructs a new model to do empiricalresearch for China on the impact of population aging on effectiveness of monetarypolicy. This constitutes the main contribution of this paper."The path of aging affects the effectiveness of monetary policy" is the core of thetheoretical part of this article. It explains how population aging affects theeffectiveness of monetary policy on perspective of six kinds of monetary policytransmission channels. The conclusions are:(1) demographic shift has a negativeeffect on Interest Rate Channel, Credit Channel and Risk Taking Channel of monetarypolicy transmission;(2) demographic shift has a positive effect on Wealth Effect and Expectation Channel of monetary policy transmission;(3) demographic shift’s impacton Exchange Rate of monetary policy transmission is different from one economy toanother, as the case may be. These conclusions form the basis of empirical research ofthis issue.According to the empirical test on income growth model and inflation model, itshows that in the long term, the demographic shift has had a negative effect on theeffectiveness of China’s monetary policy, both on output effect and the price effect.Such a conclusion is consistent with the theoretical analysis in Chapter III of thisarticle (population aging generate a negative impact on most channels of monetarypolicy transmission, and a positive impact on a small number of channels) isconsistent; Meanwhile, it is similar with Patrick Imam’s research (2013) on Westaging countries. Meanwhile, the impact of demographic shift on output effect is moresignificant than on the price effect. As Western countries are more care about pricestability and full employment, while China’s monetary policy objective is to "maintaina stable value of the currency and thereby promote economic growth", this constitutesthe unique reflect of China’s aging impact on monetary policy.