Population Ageing, Financial Leverage and Systemic Risk

Chen Yulu 1, Ma Yong 2 and Xu Lyu 3

1, 2 School of Finance, Renmin University of China; China Financial Policy Research Center, Beijing, China
3  Chongyang Institute for Financial Studies, Renmin University of China, Beijing, China

Abstract:  Population ageing and high financial leverage are two common problems faced by the world’s major economies. The recent financial crisis proved that the two issues could lead to systemic risk if not handled properly. Based on dynamic panel data from 1980 to 2012 in 119 countries, this paper examines the impact of population ageing on financial leverage from an empirical point of view and finds that there is a significant inverted U-shape relationship between the two. In addition, empirical studies show that after passing the “turning point” of ageing, there will be a marked increase in the probability of financial crisis during the “deleveraging” process. It can be projected from the empirical conclusions of this paper that China will likely enter the range of a turning point between 2019 and 2028. After that, population ageing, deleveraging and asset price collapse may have a “resonance” effect to severely impact the stability of the financial system. Therefore, China should shift to more proactive macro financial regulations as quickly as possible, as dynamic and robust management of financial leverage and forward-looking control of bubbles could ensure that the financial system remain flexible enough to avoid systemic risk to the greatest extent.

Keywords: ageing, financial leverage, systemic risk

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