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

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.

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.

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.

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’