Soft budget constraint and inflation cycles: a positive model of the macro-dynamics in China during transition

In this paper we develop a positive, general equilibrium model consistent w ith China's institutional and political environment to explain the growth a nd inflation cycles during transition. Central to our explanation is the go vernment's use of the monetary and financial system to support the state se ctor, and the growing tension between a long-running commitment to the sect or and economic decentralization. Given this commitment, we show how the cy cles emerge as a product of the government's imperfect control over credit allocation under decentralization and the high costs of implementing admini strative credit control. (C) 2001 Published by Elsevier Science B.V.