Government Intervention through Informed Trading in Financial Markets

We develop a theoretical model of government intervention in which a government with private information trades strategically with other market participants to achieve its policy goal of stabilizing asset prices. When the government has precise information and prioritizes its policy goal, both the government and the informed insider engage in reversed trading strategies, but they trade against each other. Government intervention can improve both market liquidity and price efficiency, and the effectiveness of government intervention depends crucially on the quality of information possessed by the government.