UCL Institute for Innovation and Public Purpose


Money, credit and the macroeconomy

IIPP will explore how the state can influence the financial sector and steer public investment to support sustainable economic growth and create public value.


The financial crisis of 2008 raised fundamental questions about fiscal-, monetary- and financial policy. It became clear that the banking system in advanced economies is no longer primarily supporting the real economy but rather turning towards speculative investment. IIPP’s research in this area focusses how key public sector agencies - central banks, ministries of finance, financial regulators and supervisors – can influence financial flows and steer public investment to support sustainable economic growth and industrial policy objectives whilst maintaining financial stability. The years following the crisis also demonstrated a need to rethink fiscal policy as austerity led to stagnation and rising debts relative to incomes. Here our research focusses on the way in which different types of public investment and spending can support innovation and structural change to meet the grand challenges facing modern economies.

Policy implications

Our research in this field pushes back against the conventional macroeconomic view that in the long run finance and money are ‘neutral’ and that government spending crowds out private investment. Rather, we argue, finance plays a key role in determining the trajectory of the macroeconomy because of bank’s ability to create new money and purchasing power via their lending activity. This creates the opportunity for new innovations and shifts in the direction of growth – however, without public intervention, the private financial sector can become overly short-termist and fail to support public purpose. Goverment investment can also influence the direction of growth by reducing uncertainty and raising expectations and opportunities in particular sectors of the economy.




Working papers

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