Abstract: The past decade has witnessed a rapid growth of money supply in China and consequently a large amount of money has flown into the real estate market leading to a real estate bubble,and shifting the economy from real to virtual.This has raised special attention from policy makersto professional economists and also has ignited heated debate on the direction of monetary flows and the efficacy of monetary policy. Following Brunnermeier and Sannikov (2016),we construct a stochastic growth model with endogenous asset portfolio choice.In the model,each household owns productive capital and is subject to idiosyncratic shocks.Constrained by financial frictions,households are unable to insure against such idiosyncratic risks in full,so they need to do diversification through careful asset allocation.Money is risk-free and functions as a store of value,as illustrated in the conventional literature.Our innovation relative to the previous work is to include a (risky) bubbly capital for the purpose of examining the dynamic structural change of the real sector and virtual economy.The bubbly capital does not create real wealth but gives its holder“money illusions”.The return rate for bubbly capital is monotonically increasing in its social average investment rate.That is,the more household purchase the bubbly capital,the higher its return. The effect of money growth on the economy has two competing forces.The first is the aggregate effect,i.e.,an increase in the money growth rate leads households to hold more non-money assets,thus pushes up the aggregatesavings,accumulates both productive and bubbly capital and finally promotes economic growth.The second is called the structural effect,i.e.,an increase in the money growth rate reduces the proportion of productive capital relative to bubbly capital via household portfolio choice and therefore worsens the phenomenon of“making the economy shift from real to virtual”and finally slows down economic growth.Risk is an important factor to determine the relative magnitude between these two effects.When the bubbly capital is very risky (more volatile),the aggregate effect looms large and increasing the money growth rate may boost economic growth.When the bubbly capital is not very risky,the structural effect becomes the dominant force.In this case,investing in the bubbly capital is more profitable and inflation can only transform more capital to become bubbly rather than productive and eventually hinders economic growth.Further policy simulation results show that the combination of macro-prudential policy tools and monetary policy can prevent the economy from shifting to virtual,as well as maximize social welfare.More precisely,①when the volatility of bubbly capital is sufficiently high and exceeds some bound,there exists an optimal money growth rate maximizing the social welfare; ②as long as the volatility of the bubbly capital is below this bound,increasing money supply results in welfare loss.We use the Chinese housing market as a laboratory to conduct experiments.We find that taxing on the real estate could level up the effectiveness of monetary policy through cutting down the return on holding real estate and thus suppressing the structural effect of increasing money growth.Further welfare analysis illustrates that there may exist a combination of positive real estate tax rate and positive money growth rate which maximize the total social welfare. Our paper makes contributions in several aspects.Firstly,the paper analyzes the reason and the underlying mechanism behind the phenomenon of“making the economy to shift from real to virtual”from the perspective of risk.We find from the comparative statistics that the risk of bubbly capital is key to understanding this phenomenon.The existing literature only considers the return rate rather than the risk of investment.Secondly,the paper embeds portfolio choice into an economic growth model and highlights the dual effects of money growth rate on economic growth,i.e.,the aggregate effect and the structural effect.The existing literature mainly considers a single effect.For example,Brunnermeier and Sannikov（2016）only emphasize the aggregate effect by showing that an increase in the money growth rate could decrease the riskless return rate,thus leading households to be exposed more to risky investment and promoting economic growth.However,after introducing another bubbly capital into the economy,we find that increasing money growth rate would change the Sharpe ratio of productive and bubbly capital and generate a structural effect,which pushing the economy to shift from real to virtual from bad to worse.Thirdly,the paper constructs aneconomic growth model with portfolio choice to offer a unified framework for exploring the effects of the combination of macro-prudential policy tools and monetary policy from a long-run growth perspective.The existing papers analyzing the macro-prudential policy are mainly based on the DSGE framework,so they are unable to discuss either the growth issue or the asset allocation problem.The framework in this paper can examine the interactions between portfolio choice,optimal monetary policy and macro-prudential policy.