Demographic structure and monetary policy effectiveness: evidence from Taiwan

This study applies the time-varying parameter VAR and fully modified OLS cointegrating regression models to investigate the effect of demographic change on monetary policy effectiveness in Taiwan. Our results demonstrated that monetary policy effectiveness is negatively correlated with shares of total population in children (age < 15) and two older age groups (aged 55–64 and aged ≥ 65) but it is positively associated with shares of total population in primary working age groups (aged 15–54). These patterns of age distribution impacting on monetary policy effectiveness are highly consistent with the prediction from the life cycle hypothesis of saving and consumption. With an upward trend in ageing population but a downward trend in interest rate globally, policymakers should be cautious about the fact that monetary policy is mostly likely to be less effective in an ageing society. Policy promoting fertility (by providing strong incentives to have more children) or immigration (by attracting younger and more high-skilled laborers from population growing countries) should be listed as the top priority of economic and population policies in order to alleviate the negative impacts of rapid population ageing on the economy in the near future.