Abstract: Based on China’s economic facts in recent years, this paper establishes a stochastic dynamic general equilibrium model of two-tier multi-regional government departments including fiscal decentralization and financial decentralization. The findings of the analysis show that under the fiscal decentralization model, local governments have the behaviors of investment expansion and financial competition, the state provides guarantees to the commercial banks in the forms of the last resort and write-offs of the bad loans, thus local governments can realize financial decentralization; the deepening of local government financial decentralization is directly reflected in the rising of the proportions of local commercial banks’ debt scale and local government bond scale, which has become a major factor affecting financial volatility. Under the certainty policy of“stable growth and risk prevention”, the national assistance may fall into the circulation of“assistance-local financial decentralization deepening-intensified financial volatility”. Therefore, the state should adopt some direct measures, such as credit rating of local government bonds, management of local bond quotas, establishment of local financial risk dynamic monitoring and early warning system. In addition, some long-term measures should also be adopted, such as rationalization of the administration power and financial power of the central and local governments according to the efficiency of the government expenditures at different levels, the appropriate introduction of random assistance, and the establishment of a matching mechanism between financial rights and risk-responsibilities.

Key words: financial decentralization; fiscal decentralization; national assistance; financial fluctuation