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Demographic Aging, Industrial Policy, and Chinese Economic Growth

We examine the role of demographics and changing industrial policies in accounting for the rapid rise in household savings and in per capita output growth in China since the mid-1970s. The demographic changes come from reductions in the fertility rate and increases in life expectancy, while the industrial policies take many forms. These policies cause important structural changes; first benefiting private labor-intensive firms by incentivizing them to increase their share of employment, and later on benefiting capital-intensive firms resulting in an increasing share of capital devoted to heavy industries. We conduct our analysis in a general equilibrium economy that also features endogenous human capital investment. We calibrate the model to match key economic variables of the Chinese economy and show that demographic changes and industrial policies both contributed to increases in savings and output growth but with differing intensities and at different horizons. We further demonstrate the importance of endogenous human capital investment in accounting for the economic growth in China.

Authors: 
Michael Dotsey, Federal Reserve Bank of Philadelphia
Wenli Li, Federal Reserve Bank of Philadelphia
Fang Yang, Louisiana State University
Publication Date: 
April, 2019
HCEO Working Groups: 
Publication Status: 
Document Number: 
2019-030
File Description: 
First version, March 28, 2019