How does aging population affect China's monetary policy effectiveness: Empirical evidence and theoretical analysis

This paper investigates how aging population affects the effectiveness of China's monetary policy. While existing literature has shown that aging population weakens monetary policy transmission in developed countries, its implications for emerging economies like China remain unclear. Using the local projection method and Chinese data across varying aging phases, our estimates indicate that the output stimulus from monetary policy is reduced by over 30 % as the population ages. To uncover the underlying mechanism, we construct a New Keynesian DSGE model with perpetual youth, showing that aging dampens monetary policy effectiveness primarily through the investment channel. Unlike developed countries, this effect arises because aging reduces labor supply and lowers the marginal return to capital, weakening investment responses. Our findings suggest that China's recent reform to delay retirement age can mitigate this decline, offering a policy lever to sustain monetary effectiveness amid demographic headwinds.