China's Model of Managing the Financial System
China's economic model involves active government intervention in financial markets. We develop a theoretical framework in which interventions prevent a market breakdown and a volatility explosion caused by the reluctance of short-term investors to trade against noise traders. In the presence of information frictions, the government can alter market dynamics since the noise in its intervention program becomes an additional factor driving asset prices. More importantly, this may divert investor attention away from fundamentals and totally toward government interventions (as a result of complementarity in investors' information acquisition). A trade-off arises: government's objective to reduce asset price volatility may worsen, rather than improve, information efficiency of asset prices.
-
-
Copy CitationMarkus K. Brunnermeier, Michael Sockin, and Wei Xiong, "China's Model of Managing the Financial System," NBER Working Paper 27171 (2020), https://doi.org/10.3386/w27171.Download Citation
-
Published Versions
Markus K Brunnermeier & Michael Sockin & Wei Xiong, 2022. "China’s Model of Managing the Financial System," The Review of Economic Studies, vol 89(6), pages 3115-3153. citation courtesy of 
Related
Programs
Working Groups
Conferences
More from the NBER
In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter, the NBER Digest, the Bulletin on Health, and the Bulletin on Entrepreneurship — as well as online conference reports, video lectures, and interviews.
