• Corelaţii şi interdependenţe între economia
monetar-financiară şi economia reală în
contextul fenomenelor de criză actuale
 The linkage and interdependence between
financial system and real economy in the context
of the present international crisis
Professor Dr. Lucian C. Ionescu
Universitatea Financiar - Bancară
(University for Finance and Banking)
 Şcoala de Studii Academice Postuniversitare - IBR
(The School for Postgraduate Studies)
Research motivation
Beginning with 2007/2008, the downturn in the global
economy triggered the decrease of the financial
institutions’ profitability which encountered severe losses
because of the high indebtedness on the back of gains in
real estate prices.
The uncontrolled development of structured finance that
permitted the wide dispersion of credit risk and,
consequently, the adoption of an aggressive leverage,
generated costly balance-sheet adjustments; the last
economic upturn (2003-2006/2007) was founded to a
high extent on the grounds of the excessive financial
leverage and not on real productivity growth.
Thus, the link between financial system and real economy
encompasses new dimensions, tending to highlight a
strong dissociation between financial and real yields.
Research objectives
To analyze the inter-linkage between financial system
and real economy characteristic to both prior and post
period of crisis outbreak.
Financial crises are as old as financial intermediation which is
exposed to financial fragility; an overestimated investors’
perception of risk conducts to liquidation and puts all the
financial system at risk. Since financial system was originally
meant as a support to real economy, the inter-linkage
becomes effective and economic slowdown is triggered.
During the ongoing crisis time-period, a distressed financial
system impedes the economic recovery. The experience of
Japan crisis as well as the current crisis revealed that despite
repeated liquidity injections, real economy has continued to
fall under the impact of an overleveraged private sector with
frequent low defaults which cause important losses in the
financial sector.
The research will focus on the characteristics implied by the
actual crisis from the perspective of the two-way link between
financial system and real economy, concentrating on the
mutations within the financial system which contributed to
further imbalances
The financial crisis started in 2007/2008
represents a highly dangerous
chain reaction:
Liquidity shortage
→ Banking failures
Investment deadlock → Real economy deep & prolonged recession
Tough increase in budget deficits & public debt
Slowing down the economic recovery
The rift developed between the real economy and the nominal
Excessive autonomy of monetary & financial flows vis-à-vis the
real economic circuit
The “free market“ fundamentalism generated an overwhelming
expansion of financial speculation (mainly through financial
To highlight the transmission vectors of the
double-side relationship between financial
system and real economy
The peculiar transmission chain of the recent financial crisis was
generated by a multitude of vectors originating mainly in a
mixture of aspects relative to the interaction between real
economy and financial system:
a) Abundant liquidity;
b) Capital market financing;
c) Credit risk transfer;
d) Pro-cyclical accounting and regulation framework, including
the Basel II Accord..
In the context of interest rate reduction and large liquidity in the
market, the assets’ prices (especially in the real estate sector)
have considerably touched peak levels, rendering the households
and, in fact, the real economy highly vulnerable to a potential rise
in interest rate.
Excessive capital market financing valorized by the intermediary
of innovative financial instruments, such as vendor financing and
venture capital products, gave incentive to a high vulnerability of
real economy to subsequent decrease of credit quality.
Long economic & financial cycles
from the 20 th to the 21 st century
Descending/stagnant stages
Ascending/expansinary stages
1929/30 → 1944/45
1946/47 → 1968/69
1970/71 → 1981/82
1983/84 → 2006/07
2007/08 → ~2018/19 (?)
The descending/stagnant stages of long cycles
generally tend to determine rethinking and
restructuring the organizing and functioning models
for both real economy and international monetary &
financial system.
To disclose appropriate strategies in order to
manage the linkage between real economy and
financial system during the crisis
The experience of the actual financial crisis revealed a powerful procyclical character in respect of the various policies that amplified the
adverse effects.
Therefore, research envisages elaborating complex analyses on the
set of policy measures mixed up in a convenient manner in order to
reduce the negative effects implied by the transmission chain
mechanisms from financial sector to real economy:
macro-prudential regulation;
forward looking provisioning;
strengthening of the financial institutions supervision,
especially at the level of the stress tests importance,
irrespective of the phase of the business-cycle;
reviewing of the global accounting standards;
enlargement of disclosure requirements, including loan
classification by rating grade;
enhancement of effective corporate governance mechanisms,
reviewing compensation practices in financial institutions
 Creating a new mutually beneficial correlation between real economy
and monetary & financial system.
Conclusion & prospects
The organic correlation between real economy and the
financial system leads the way to understanding the crucial
importance of the interdependence between real and nominal
convergence for realizing a viable economic & monetary union.
Prospects for adopting Euro (EU single currency) – the
Romanian case
Combining the basic thesis of this paper with the interpretation
of the evolution of long economic & financial cycles, we
consider the time horizon of 2017-2019, which would allow:
A substantial effective advance for real & nominal
Maintaining the flexibility of macroeconomic policies by an
independent monetary policy;
Fine-tuning of business cycles - synchronization and

correlation between real economy and the financial system