Monetary Game Research Articles

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.

Central bank independence and the sacrifice ratio

This paper analyzes the impact of central bank independence on the sacrifice ratio. A monetary game model is constructed where the output depends on past inflation due to some indexation in the economy and where the slope of the short-run Phillips curve depends on the average inflation rate. The model predicts the following main results: A higher degree of central bank independence leads to a higher sacrifice ratio. There is no general positive correlation between the degree of central bank independence and output variance. Stabilization policy in each period is linked to past inflation. The higher past inflation, the less the policymaker stabilizes an output shock. From a welfare point of view, the model shows that the sacrifice ratio is not an appropriate measure to assess the costs of central bank independence.

Monetary management and intergovernmental relations in China

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.