Events

Professor Jiang Wang
Mizuho Financial Group Professor
MIT Sloan School of Management

Government intervention in the financial market through its own trading fundamentally changes the market’s structure, function and outcome. We develop a general equilibrium framework to study the impact of government trading on investor welfare. We show that with incompleteness and information asymmetry, the market equilibrium is in general suboptimal and government intervention can improve investor welfare even with no additional information. However, the welfare impact of government intervention is sensitive to the details of the economy and the policy design. Popular policy targets such as price stability, market liquidity and informational efficiency can have different welfare implications. Performance measures for government trades based on market prices can be misleading since these trades also affect prices and welfare.