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.