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Financial–Real-Side Interactions in an Extended Monetary Circuit with Shadow Banking: Loving or Dangerous Hugs?

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  • Alberto Botta
  • Eugenio Caverzasi
  • Daniele Tori

Abstract

Monetary circuit (MC) theory is one of the most interesting attempts to formally describe the functioning of a monetary production economy as centered on the concept of the 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 article, 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 an MC framework and understanding how financialization could have changed real-financial interactions.

Suggested Citation

  • Alberto Botta & Eugenio Caverzasi & Daniele Tori, 2015. "Financial–Real-Side Interactions in an Extended Monetary Circuit with Shadow Banking: Loving or Dangerous Hugs?," International Journal of Political Economy, Taylor & Francis Journals, vol. 44(3), pages 196-227, July.
  • Handle: RePEc:mes:ijpoec:v:44:y:2015:i:3:p:196-227
    DOI: 10.1080/08911916.2015.1095049
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    Cited by:

    1. Alberto Botta & Eugenio Caversazi & Daniele Tori, 2016. "The macroeconomics of shadow banking," Working Papers PKWP1611, Post Keynesian Economics Society (PKES).
    2. Sergio Cesaratto, 2017. "Beyond the traditional monetary circuit: endogenous money, finance and the theory of long-period effective demand," Department of Economics University of Siena 757, Department of Economics, University of Siena.
    3. Jo Michell, 2017. "Do Shadow Banks Create Money? ‘Financialisation’ and the Monetary Circuit," Metroeconomica, Wiley Blackwell, vol. 68(2), pages 354-377, May.
    4. Michalis Nikiforos & Gennaro Zezza, 2017. "Stock-flow Consistent Macroeconomic Models: A Survey," Economics Working Paper Archive wp_891, Levy Economics Institute.

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