Interaction between Financial Economy and Real Economy

The paper analyzes the interaction between the financial economy and real economy on a data sample of 185 economies over 1990-2019. In particular, the financial economy mentions to the value of financial markets, including the bonds, debts, securities and related assets, while the real economy is based on the production capacity of an economy. Methodology: The research methodology is based on a quantitative analysis. This method carries out the graphical and data analysis, then, derives main princinple underlying the interaction between the financial and real economy. Findings: The evidence shows that the financial economy can have various correlation pattern with the real economy. There exists a non-linear dependence pattern of economic growth on the stock market value per GDP and a negative correlation of domestic credit to private sector with the economic growth. Implications: The empirical evidence suggests that the financial economy does not necessary illustrate the production capacity but mainly illustrates the expectation by the households and investors. Thus, an appropriated policy can be the participation of government to provide useful information to drive and stablize the financial markets, especially during the recession time period.