FINANCIAL REFORMS AND REGIONAL INVESTMENT CONFLICTS IN CHINA - A GAME-THEORETIC ANALYSIS

In the transition from a command to a market economy, macroeconomic st abilization poses a grave problem facing the reform governments. A dis tinct feature of China's economic fluctuations in the post-1979 period has been its ''soft-constraint competition''. A two-region game theor etical model is developed in this paper. We find that monetary decentr alization in the earlier stage of economic liberalization takes the in flation and fiscal deficits out of the control of the central monetary authorities. The prospective financial reforms will subject local gov ernments' investment drives to the indirect regulations of monetary po licy; but by strengthening monetary restraints, will result in massive borrowing from the domestic, or perhaps more likely, the internationa l financial market to finance government deficits, and hence a large b uild-up in the stock of debts.