The Effect Of Aging Population On Monetary Policy In China

Population proportion that above 65 years increased from 6.69% in 2000 to 10.1% in 2014.This proportion has grown at 0.23% per year since China entered the aging society. This trend of aging has significant influence on Chinese economy and society. China’s monetary authorities have stressed that the effects of aging population on monetary policy implementation should be taken into consideration when studying the monetary policy transmission mechanism. As interest rates are increasingly determined by the market in our country, the transmission mechanism of interest rates, which is an important channel of the monetary policy transmission, has a growing influence on the achievements of monetary policy. This paper investigates the influence of aging population on achievements of monetary policy and clears the barriers during the interest rates transmission by analyzing the monetary policy transmission mechanism. It has important practical significance and application value to improve the effect of monetary policy.This paper formed the theoretical basis based on the life cycle theory and the interest rates transmission mechanism of monetary policy. The relationship between China’s population age structure and Level of Interest Rates has been investigated by using the life-cycle theory. The preliminary results showed that the elderly dependency ratio has negative correlation with the level of interest rates. Fourteen countries, which have stepped into an aging population, were selected to estimate their dynamic panel using the correction method. The estimated results indicated that the elderly dependency ratio has negative correlation with the level of interest rates. The interest rates decreased 0.382% when elderly dependency ratio increased 1%. The results of the comparative confirmed the strong negative correlation between the elderly dependency ratio and the level of interest rates.Based on this paper, China’s monetary authorities should promote the marketization of interest rates, upgrade the industrial structure, improve the efficiency of capital allocation and formulate corresponding policies to enhance the positive effects of financial on the real industry, as the interest rates are low. The ageing population should be taken into consideration when making monetary policy to exclude obstacle of interest conduction. In this way, the efficiency of monetary policy transmission and the quality of whole economy operation are both improved.