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

Abstract

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 fluxreflux 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 realfinancial interactions.

Stock-Flow Consistent Macroeconomic Models: A Survey

“…Such similarities were noted early (Godley 2004;Lavoie 2004) and paved the way for a number of circuitist analyses of the developments in the financial sector (Bellofiore and Passarella 2010;Passarella 2012Passarella , 2014Botta, Caverzasi, and Tori 2015;Sawyer and Passarella 2017), as well as comparisons between the TMC and SFC approaches (Zezza 2012).…”

“…In a fairly complex model, Botta, Caverzasi, and Tori (2015) disaggregate the household sector into "workers" and "rentiers," and introduce special purpose vehicles, money market mutual funds, investment funds, and "broker and dealers" as parts of the financial sector, with a high level of detail in the balance sheet for each sector, where they consider two real assets (productive capital and housing) and nine financial assets (loans, mortgages, deposits, obligations of financial and nonfinancial firms, money shares, longer shares, asset-backed securities, and repos). They provide a very rich and enlightening view of a complex, modern financialized economy, but do not attempt to provide formal behavioral rules for portfolio management, nor a closure for their model, which therefore is limited to a (very interesting) accounting framework.…”

Stock‐flow Consistent Macroeconomic Models: A Survey

“…Moreover, in highlighting real financial interactions the SFC approach has many similarities to the theory of the monetary circuit (TMC), usually associated with Augusto Graziani (). Such similarities were noted early (Godley ; Lavoie, ) and paved the way for a number of circuitist analyses of the developments in the financial sector (Bellofiore and Passarella, ; Passarella, , ; Botta et al ., ; Sawyer and Passarella, ), as well as comparisons between the TMC and SFC approaches (Zezza, ).…”

Do Shadow Banks Create Money? ‘Financialisation’ and the Monetary Circuit

“…This process by which bank lending and money creation is transformed into a chain of shadow bank liabilities is illustrated in figure 3. 12 The process is 12 A more complex analysis of the internal workings of the shadow banking system from a circuitist perspective is presented by Botta et al (2015).…”

“… A more complex analysis of the internal workings of the shadow banking system from a circuitist perspective is presented by Botta et al . ().…”