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Financial-real side interactions in an extended monetary circuit with shadow banking: loving or dangerous hugs?

Financial-real side interactions in an extended monetary circuit with shadow banking: loving or dangerous hugs?

Botta, Alberto, Caverzasi, Eugenio and Tori, Daniele (2015) Financial-real side interactions in an extended monetary circuit with shadow banking: loving or dangerous hugs? [Working Paper]

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Abstract

Monetary circuit theory is one of the most interesting attempts to formally describe the functioning of a monetary production economy as centered around the concept of flux-reflux of money. Endogenous money creation by commercial banks allows the circuit to open and firms to implement production processes. Financial markets “passively” close the circuit by intermediating savings via bond and equity issuance. Despite its natural focus on financial-real side links, the monetary circuit literature has paid relatively little attention to ‘financialization’ and the way it has modified real-financial dynamics. In this paper, we analyze whether the flux-reflux perspective of the circuit may be fruitfully applied to the description of the linkages between the real economy and finance in a financialized economy. We propose two interconnected circuits, one for the real economy and one for the financial one. In this context, finance can still ensure a consistent closure of the whole system, thus directly allowing the functioning of the real economy. Newly developed inside-finance interactions, however, may indirectly influence real world dynamics by easing/restricting access to credit/financial markets and give rise to boom-and-bust cycles. Our aim is twofold: modeling modern financial worlds within a MC framework and understanding how financialization could have changed real-financial interactions.

Item Type: Working Paper
Uncontrolled Keywords: monetary circuit theory; financialization; shadow banking;
Subjects: H Social Sciences > H Social Sciences (General)
Faculty / Department / Research Group: Faculty of Business > Greenwich Political Economy Research Centre (GPERC)
Related URLs:
Last Modified: 19 Nov 2015 15:14
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: None
URI: http://gala.gre.ac.uk/id/eprint/14069

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