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China's Model of Managing the Financial System

Markus Brunnermeier (), Michael Sockin and Wei Xiong ()

No 27171, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: G01 G14 G28 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-cna, nep-ifn and nep-tra
Note: AP CF IFM ME
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