Reforming China's Financial System and Monetary Policies : A Sovereign Remedy for Locally Initiated Investment Expansion?

This paper studies the efficacy of China's financial reforms in helping the central monetary authority to achieve its goals of macroeconomic stabilization. A local-local monetary game is presented which examines the investment competition between local governments in different hypothetical financial settings. It is shown that direct means of credit control and indirect instruments of monetary policy have both strengths and weaknesses, suggesting that their combination would be desirable in macroeconomic management under the new financial arrangement