This paper introduces the population structure, the fiscal expenditure structure and the monetary policy into the new Keynesian dynamic stochastic general equilibrium framework, focusing on the analysis of the impact of population aging on China’s macro-economic control policies. The results of the study show that: In addition to the negative impact of the aging population itself on economic growth, the space for maneuvers left for macro-control policies has become increasingly limited, affecting the effectiveness of policy control and increasing the cost of policy implementation. First, with the aging population structure, the positive effects of macroeconomic control policies have been weakened and the negative effects have been strengthened. This shows that population aging has undoubtedly weakened the effectiveness of fiscal and monetary policies. In terms of macroeconomics, the basic effect of population aging is that it will profoundly change the relationship between the national income distribution pattern and the allocation of economic resources. In the long run, population aging reduces labor supply, and the overall economic life cycle gap widens the lack of economic growth and the overall welfare level of society continues to decline. In the short term, accelerating the burden of financial pensions has significantly reduced the space for fiscal policy maneuvers and also weakened the ability of the government to implement anti-cyclical fiscal policies. In terms of policy assessment, the decline in fiscal multipliers has masked the enthusiasm of the financial sector, amplifying its crowding-out effect and impairing the quality of financial performance. In terms of the monetary policy, population aging may bring deflationary pressures, limit the monetary policy’s ability to stimulate aggregate demands, force the Central Bank to adopt more radical measures to achieve the same effect, and be directly exposed to higher macro-economic risk exposures and strengthen financial fragility. Second, in the elderly-dominated society, the central bank’s tolerance for inflation rate has decreased, and interest rate adjustments are more likely to approach the lower limit. Once these new weighing factors are superimposed on the cycle, they will further complicate the operation of the monetary policy. The Central Bank must not only prevent the spread of inflation, protect the economic interests of the elderly, but also prevent the " hard landing” economic risks caused by excessive tightening. Objectively, the frequency of policy switching will exceed the previous level, and unconventional monetary policies will probably become the norm. In terms of stabilizing the economy and finance, the lack of effective demand caused by population aging has weakened the effectiveness of traditional monetary policy operations. Severe aging may further trigger liquidity traps and no longer be affected by loose monetary policies. Low interest rates are stimulating investment and consumption. The role is limited. Enterprises no longer pursue profit maximization but minimize debt. As a result, the demand for bank credit is insufficient and the liquidity of the central bank is difficult to release. Under such circumstances, structural reform will become a necessary supplement to the monetary policy. Third, increasing the proportion of working population and maximizing the negative effects of accelerating population aging can greatly improve and increase the effectiveness of fiscal and monetary policies. The loose population policy does not necessarily change the demographic structure and promote economic growth in the short term. The economic problems brought about by population aging are a rather complicated social project. It is not simply a matter of " opening up policies and stimulating fertility” that can open the door to alleviate the aging population. Moreover, increasing the labor participation rate will increase the proportion of the working population to a certain extent, effectively increase the supply of labor force, and reduce the tax burden on each of the young people. More importantly, increasing the labor participation rate can effectively increase the labor supply, not only helping to ease the burden of government pensions and guaranteeing the reliability of the pension system in the medium term, but also helping to reduce macroeconomic fluctuations, expand fiscal and monetary policies to create more space for operations, stimulate private consumption and investment, and drive economic growth.
/ Journals / Journal of Finance and Economics
Journal of Finance and Economics
LiuYuanchun, Editor-in-Chief
ZhengChunrong, Vice Executive Editor-in-Chief
YaoLan BaoXiaohua HuangJun, Vice Editor-in-Chief
Aging and the Effectiveness of Fiscal and Monetary Policies
Journal of Finance and Economics Vol. 44, Issue 07, pp. 16 - 32 (2018) DOI:10.16538/j.cnki.jfe.2018.07.002
Summary
References
Summary
Keywords
[1]Ba S S.The macro-financial implications of population structure[R]. China Finance 40 Forum Working Paper, 2012. (In Chinese)
[2]Cai F. Demographic transition, demographic dividend, and Lewis turning point in China[J]. Economic Research Journal, 2010, (4): 4-13. (In Chinese)
[3]Chen X L, Ma X. “Debt-deflation” risks and coordination between monetary and fiscal policies[J]. Economic Research Journal, 2016, (8): 28-41. (In Chinese)
[4]Du Y. Demographic changes, labor market transition and economic development in China[J]. International Economic Review, 2010, (6): 136-148. (In Chinese)
[5]Gong F, Yu J L. Population aging, tax burden and fiscal sustainability[J]. Economic Research Journal, 2015, (8): 16-30. (In Chinese)
[6]Guo C L, Hu Y G, Li Y H. Fiscal policy expansion, debt repayment approach and household consumption[J]. Management World, 2013, (2): 64-77. (In Chinese)
[7]Huang Z G. The mechanism of imbalance adjustment of prices: A new Keynesian perspective[J]. South China Journal of Economics, 2010, (4): 52-64. (In Chinese)
[8]Li S Y, Feng J X. The impact of aging on Chinese government balance sheet and comparative analysis on the policy space[J]. Economic Perspectives, 2014, (1): 78-81. (In Chinese)
[9]Liu Q Z, He Q. Aging, economic growth, and fiscal policy[J]. China Economic Quarterly, 2013, (1): 119-134. (In Chinese)
[10]Liu X L. Study on the financing gap and sustainability of China’s pension system[J]. China Industrial Economics, 2014, (9): 25-37.
[11]Liu X, Huang X, Zheng D. Impact of aging population on China’s monetary policy conduction mechanism[J]. Finance & Economics, 2014, (9): 41-48. (In Chinese)
[12]Ronald Lee, Andrew Mason. The price of maturity[J]. IMF Finance & Development, 2017, (3): 7-9. (In Chinese)
[13]Ma Y Q, Ren Y. Economic results of the birth rate changing under shocking of aging in China[J]. Population & Economics, 2017, (2): 21-31. (In Chinese)
[14]Patrick Imam. Senior shock[J]. IMF Finance & Development, 2014, (3): 20-24. (In Chinese)
[15]Peng W S. Diminishing dividends: Finding a new balance in China[M]. Beijing: Social Sciences Academic Press, 2013. (In Chinese)
[16]Wang G J, Tian G Q. Government spending multiplier[J]. Economic Research Journal, 2014, (9): 4-19. (In Chinese)
[17]Wang X L, Fan G. Sustainability of China’s economic growth: A cross-century review and outlook[M]. Beijing: Economic Sciences Press, 2000.
[18]Wang W, Ai C R. The aging population and the dynamic evolution of China’s savings rate[J]. Management World, 2015, (6): 47-62. (In Chinese)
[19]Wu G, Zeng Q T. Population aging and monetary policy: Debates and consensus[J]. International Economic Review, 2015, (4): 99-109. (In Chinese)
[20]Xu Z W, Lin R W. Bayesian estimation of total production function in China: From the perspective of dynamic stochastic general equilibrium[J]. World Economic Papers, 2011, (2): 87-102. (In Chinese)
[21]Xue H X. Output persistence in China: A dynamic analysis based on sticky-price and sticky-wage models[J]. China Economic Quarterly, 2010, (4): 1359-1384. (In Chinese)
[22]Zhang J, Zhang Y. Recalculating the capital of China and a review of Li and Tang’s Article[J]. Economic Research Journal, 2003, (7): 35-43. (In Chinese)
[23]Zhou Y, Tang X J. Aging and the effectiveness of monetary policy[J]. Journal of Xi’an Jiaotong University (Social Sciences), 2015, (5): 25-32. (In Chinese)
[24]Andersen T M. Fiscal sustainability and fiscal policy targets[R]. ASB Economic Working Papers, 2012.
[25]Aschauer D. Fiscal policy and aggregate demand[J]. American Economic Review, 1985, 75(1): 117-270.
[26]Barro R. Government spending in a simple model of endogenous growth[J]. Journal of Political Economy, 1990, 98(5): 103-S126.
[27]Bean C. Global demographic change: Some implications for central banks[R]. Bank of England Working Paper, 2004.
[28]Bloom D E, Canning D, Fink G. Implications of population aging for economic growth[R]. NBER Working Paper No. 16705, 2011.
[29]Borio C, Zhu H. Capital regulating, risk-taking and monetary policy: A missing link in the transmission mechanism[R]. BIS Working Papers N0. 268, 2008.
[30]Bruckner M, Pappa E. Fiscal expansions, unemployment, and labor force participation: Theory and evidence[J]. International Economic Review, 2012, 53(4): 1205-1228.
[31]Burtless G. The impact of population aging and delayed retirement on workforce productivity[R]. Center for Retirement Research at Boston College, 2013.
[32]Campbell J, Mankiw G. Consumption, income, and interest rates: Reinterpreting the time series evidence[J]. NBER Macroeconomics Annual, 1989, (4): 185-216.
[33]Cipriani G P. Population aging and PAYG pensions in the OLG model[J]. Journal of Population Economics, 2014, 27(1): 251-256.
[34]Esteban-Pretel J, Sawada Y. On the role of policy interventions in structural change and economic development: The case of postwar Japan[J]. Journal of Economic Dynamics and Control, 2014, 40(1): 67-83.
[35]Ewijk C. Ageing and the sustainability of Dutch public finances[R]. CPB Netherlands Bureau for Economic Policy Analysis, 2006.
[36]Fujiwara I, Hara N, Hirakata N, et al. Japanese monetary policy during the collapse of the bubble economy[J]. Monetary and Economic Studies, 2007, 28(2): 89-128.
[37]Fujiwara I, Teranishi Y. A dynamic new Keynesian life-cycle model: Societal aging, demographics, and monetary policy[J]. Journal of Economic Dynamics and Control, 2008, 32(8): 2398-2427.
[38]Gali J. Monetary policy, inflation, and the business cycle[M]. Princeton University Press, 2008.
[39]Gertler M. Government debt and social security in a life-cycle economy[J]. Carnegie-Rochester Conference Series on Public Policy, 1999, 50: 61-110.
[40]Gertler M, Karadi P. A model of unconventional monetary policy[J]. Journal of Monetary Economics, 2011, 58(1): 17-34.
[41]Hamori S, Asako K. Government consumption and fiscal policy: Some evidence from Japan[J]. Applied Economic Letters, 1999, 6(9): 551-555.
[42]Imam P A. Shock from graying: Is the demographic shift weakening monetary policy effectiveness[R]. IMF Working Paper No. 13/191, 2013.
[43]Kara E, von Thadden L. Interest rate effects of demographic changes in a New-Keynesian life-cycle framework[R]. ECB Working Paper No. 1273, 2010.
[44]Kantur Z. Aging and monetary policy[R]. Department of Economics, Bilkent University, Ankara, Turkey, 2013.
[45]Linnemann L, Schabert A. Fiscal policy in the new neoclassical synthesis[J]. Journal of Money, Credit, and Banking, 2003, 35(6): 911-929.
[46]Liu Z, Miao J, Tao Z. Land prices and unemployment[J]. Journal of Money Economics, 2016, 80: 86-105.
[47]Mayer E, Moyen S, Stähler N. Government expenditures and unemployment: A DSGE perspective[R]. Deutsche Bundesbank Discussion Paper, 2010.
[48]Mitchell P R, Sault J E, Wallis K F. Fiscal policy rules in macroeconomic models: Principles and practice[J]. Economic Modelling, 2000, 17(2): 171-193.
[49]Mountford A, Uhlig H. What are the effects of fiscal policy shocks[J]. Journal of Applied Econometric, 2009, 24(6): 960-992.
[50]Nakahigashi M, Yoshino N. Changes in economic effect of infrastructure and financing methods: The Japanese case[J]. Public Policy Review, 2017, 12: 47-65.
[51]Perkins D. Reforming China’s economy system[J]. Journal of Economic Literature, 1998, (2): 601-645.
[52]Poterba J M. Demographic structure and asset returns[J]. Review of Economics and Statistics, 2001, 83(4): 565-584.
[53]Poterba J M. Population aging and financial markets[R]. NBER Working Paper, 2004.
[54]Ripatti A. “A dynamic new keynesian life-cycle model: Societal aging, demographics, and monetary policy” by Ippei Fujiwara and Yuki Teranishi. A comment[J]. Journal of Economic Dynamics and Control, 2008, 32(8): 2507-2511.
[55]Puhakka M. The effects of aging population on the sustainability of fiscal policy[R]. Bank of Finland Research Discussion Paper No. 26, 2005.
[56]Schmitt-Grohé S, Uribe M. Optimal simple and implementable monetary and fiscal rules[J]. Journal of Monetary Economics, 2007, 54(6): 1702-1725.
[57]Thøgersen J. Population ageing and capital accumulation: A simple OLG model with PAYGO pensions[J]. Theoretical Economics Letters, 2015, 5(2): 55031.
[58]Woodford M. Interest and prices: Foundations of a theory of monetary policy[M]. Princeton: Princeton University Press, 2003.
[59]Yoshino N, Miyamoto H. Decreased effectiveness of fiscal and monetary policies in Japan’s aging society[R]. ADBI Working Paper, 2017.
Cite this article
Li Jianqiang, Zhang Shucui. Aging and the Effectiveness of Fiscal and Monetary Policies[J]. Journal of Finance and Economics, 2018, 44(7): 16-32.
Export Citations as:
For