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A Flow-of-Funds Perspective on the Financial CrisisThe Quantity Theory of Credit and Some of Its Policy Implications

A Flow-of-Funds Perspective on the Financial Crisis: The Quantity Theory of Credit and Some of... [There has long been an Interest among economists and policy-makers in the question of how the ‘tangible’’ economy is related to the ‘non- tangible’ financial and monetary system. Of course, the very framing of the question betrays long-standing presuppositions: it was first asked by classical economists, who also postulated that the monetary part of the economy is but a ‘veil’ over the ‘real’ economy that does not in any way affect the latter. Classical economics, just like today’s dominant school of thought, the neo-classical and new classical economics, argued that monetary variables and, indeed, the entire financial sector repre- sent but a nominal scale factor that cannot affect the tangible economy. The idea is simple — and deceptive: if markets are complete, compet- itive and virtually in a permanent state of equilibrium, and everyone is perfectly informed about everything, including how much money is produced, by whom, and given to whom, then all nominal variables will move immediately in line with any monetary expansion or contraction, leaving underlying physical quantities and, therefore, price-adjusted so- called ‘real’ variables unchanged. Thus, one can neatly separate the economic system into two parts, namely the ‘real’ economy of produc- tion, employment, consumption and so forth, on the one hand, and that part that deals with anything financial or monetary, which can be neglected when analysing ‘real GDP’ or ‘real growth’ (since it cannot affect the latter), on the other.] http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png

A Flow-of-Funds Perspective on the Financial CrisisThe Quantity Theory of Credit and Some of Its Policy Implications

Part of the Palgrave Studies in Econmics and Banking Book Series
Editors: Winkler, Bernhard; Riet, Ad van; Bull, Peter
Werner, Richard A.
A Flow-of-Funds Perspective on the Financial Crisis — Dec 4, 2015
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23 pages

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Publisher
Palgrave Macmillan UK
Copyright
© Palgrave Macmillan, a division of Macmillan Publishers Limited 2014
ISBN
978-1-349-46944-4
Pages
22 –45
DOI
10.1057/9781137352989_3
Publisher site
See Chapter on Publisher Site

Abstract

[There has long been an Interest among economists and policy-makers in the question of how the ‘tangible’’ economy is related to the ‘non- tangible’ financial and monetary system. Of course, the very framing of the question betrays long-standing presuppositions: it was first asked by classical economists, who also postulated that the monetary part of the economy is but a ‘veil’ over the ‘real’ economy that does not in any way affect the latter. Classical economics, just like today’s dominant school of thought, the neo-classical and new classical economics, argued that monetary variables and, indeed, the entire financial sector repre- sent but a nominal scale factor that cannot affect the tangible economy. The idea is simple — and deceptive: if markets are complete, compet- itive and virtually in a permanent state of equilibrium, and everyone is perfectly informed about everything, including how much money is produced, by whom, and given to whom, then all nominal variables will move immediately in line with any monetary expansion or contraction, leaving underlying physical quantities and, therefore, price-adjusted so- called ‘real’ variables unchanged. Thus, one can neatly separate the economic system into two parts, namely the ‘real’ economy of produc- tion, employment, consumption and so forth, on the one hand, and that part that deals with anything financial or monetary, which can be neglected when analysing ‘real GDP’ or ‘real growth’ (since it cannot affect the latter), on the other.]

Published: Dec 4, 2015

Keywords: Asset Price; Money Supply; Banking Sector; European Central Bank; Capital Gain

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