The Chemistry of the Macroeconomy

Abstract

Asset booms and busts have accompanied or caused recent macroeconomic fluctuations. However, asset prices are not a part of GDP nor are they included in inflation calculations. Links between the financial sector and real economy are increasingly important. This paper borrows an approach from the natural sciences to explain the optimal amount of transactions for unbacked assets. Excessive transactions for such assets impede long run growth. This theory does not involve asset prices, only transactions, offering a distinction from literature on asset bubbles, and leads to concise policy recommendations to improve macroeconomic stability.