Abstract
This paper argues that the Chinese central bank per se is not to be blamed for the excessive monetary growth that created repeated high inflation; rather, the institutional features of the current central-local monetary relations generate this result endogenously. A central-local monetary game is presented as a theory to explain how local governments take advantage of the central bank's lack of commitment to a preannounced credit policy by forcing the central bank to revise the credit ceilings upward, thus creating inflation. This game also explains how reform cycles — the alternating of decentralization and recentralization — over the past decade could be a consequence of the central-local monetary interaction, and why reform cycles have coincided with the monetary cycles. The implications of the 1994 monetary reform are assessed under the framework of the monetary game.
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