Crisis and the Role of Money in the Real and Financial Economies„An Innovative Approach to Monetary Stimulus

The narrative in the real economy is one of output, capital investment, innovation and productivity, whilst in the financial economy it is of increases in existing asset values and yield.

Over- allocation of capital into the financial economy slows real economy growth rates andmisprices financial economy assets (artificially depressing savings yields). This mismatch, in turn, leads to financial crises as markets force adjustments between asset prices and the real economy cashflows that support them.

Rather than opting for Friedman’s helicopter money (Friedman 1969), which is focused at consumers and whose benefit can be reduced through leakages to imports and saving(s) transferred into the financial economy, we opt for a ‘smart helicopter money’ concept to target the supply side of the real economy, which existing mechanisms fail to reach. To re

Restrictive assumptions such as ‘rational expectations’ (Lucas 1976; Muth 1961), representative rational agent modelling, probability theory, and stochastic modelling fail to support understanding as in a crisis we face the uncertainty described by Frank Knight (Knight 1921). Arguably, this is one of the key challenges that Keynes (1936) addressed

separation between the real and financial economies results in protracted capital misallocation, as flows of funds and created credit are focused into purchasing existing assets in the pursuit of stable savings returns from known predictable cashflows and anticipated capital gains in asset values.

central banks to ‘monetary-fund’ government deficits. They argue this allows the state to balance economic activity by acting as the ‘employer of last resort’