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

Richard Simmons, Paolo Dini, Nigel Culkin and Giuseppe Littera

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: monetary policy; financial crisis; helicopter money; real economy; financial economy; quantitative easing; complementary currency; velocity of circulation; innovation; economic growth (search for similar items in EconPapers)
JEL-codes: F3 G3 J1 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2021-03-20
New Economics Papers: this item is included in nep-cba, nep-fdg and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Journal of Risk and Financial Management, 20, March, 2021, 14(3). ISSN: 1911-8074

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:110904

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