China's Model of Managing the Financial System

53 Pages Posted: 18 May 2020

See all articles by Markus K. Brunnermeier

Markus K. Brunnermeier

Princeton University - Department of Economics

Michael Sockin

University of Texas at Austin - Red McCombs School of Business

Wei Xiong

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: May 2020

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.

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Suggested Citation

Brunnermeier, Markus Konrad and Sockin, Michael and Xiong, Wei, China's Model of Managing the Financial System (May 2020). NBER Working Paper No. w27171, Available at SSRN: https://ssrn.com/abstract=3603801

Markus Konrad Brunnermeier (Contact Author)

Princeton University - Department of Economics ( email )

Bendheim Center for Finance
Princeton, NJ
United States
609-258-4050 (Phone)
609-258-0771 (Fax)

HOME PAGE: http://www.princeton.edu/¡­markus

Michael Sockin

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

Wei Xiong

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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