NATIONAL BUREAU OF ECONOMIC RESEARCH
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China's Model of Managing the Financial System

Markus K. Brunnermeier, Michael Sockin, Wei Xiong

NBER Working Paper No. 27171
Issued in May 2020
NBER Program(s):Asset Pricing, Corporate Finance, International Finance and Macroeconomics, Monetary Economics

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.

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Document Object Identifier (DOI): 10.3386/w27171

 
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