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Crisis and the role of money in the real and financial economies: an innovative approach to monetary stimulus

Simmons, Richard, Dini, Paolo, Culkin, Nigel and Littera, Giuseppe (2021) Crisis and the role of money in the real and financial economies: an innovative approach to monetary stimulus. Journal of Risk and Financial Management, 14 (3). ISSN 1911-8074

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Identification Number: 10.3390/jrfm14030129

Abstract

‘Financial crisis’ is sometimes regarded as synonymous with ‘economic crisis’, but this is an oversimplification and risks missing the feedback loops between the financial and real economies. In this paper, the role of money is revisited in the context of distinguishing the real economy from the financial economy. A theoretical framework is developed to explain how endogenous (bank credit) and central bank exogenous (quantitative easing, QE) money creation feed into the real and financial economies. It looks at how the velocity of monetary circulation varies between the two economies and across asset types within the financial economy. Monetary transmission mechanisms are set into a framework that helps explain how QE stimulus risks combining asset price bubbles with poor growth in the real economy. The real economy transmission mechanism of ‘helicopter money’ is given context, enabling an assessment of the efficacy of both the QE and helicopter money policy routes. Finally, we present a new type of monetary transmission, ‘Smart Helicopter Money’, to deliver monetary stimulus to innovators, SMEs and high-growth firms via both complementary currencies and a modified form of QE in order to achieve proportionally greater impact on the real economy.

Item Type: Article
Official URL: https://www.mdpi.com/journal/jrfm
Additional Information: © 2021 The Authors
Divisions: Media and Communications
Subjects: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Date Deposited: 22 Jun 2021 13:03
Last Modified: 28 Jun 2021 09:33
URI: http://eprints.lse.ac.uk/id/eprint/110904

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