ABSTRACT
This chapter discusses the interconnectedness of real and financial sectors that also makes the working of the macro economy so vulnerable to crashes in one part. Potentially destabilizing feedback channels of advanced macroeconomies are detected and investigate. The chapter consider the interaction of asset markets with real economic activity and on the other hand the interaction of real activity with the credit channel, here based on commercial banking controlled by the central bank via its money supply policy. Financial-market-oriented open market policies, augmented by a procyclical term and Tobin capital gain taxation, do the job of stabilizing the economy characterized by a Tobinian financial structure and heterogeneous expectation formation. The chapter concludes that the financial markets must be regulated and also handled by open market policy with care in order to ensure the stability of the real-financial market interaction in the considered economy.
