The theoretical advantages of helicopter money at the ZLB is well known. It guarantees to translate to NGDP – if the money is spent on goods or services and receipts are respent with sufficient velocity then it is much more direct than other forms of monetary policy such as QE with less complex and potentially negative side effects. Indeed it is better considered as a form of fiscal policy. Moreover so it exposes the artificial categorisation of the single monetary-fiscal policy spectrum. Policy options are better considered in a multiple dimensional framework.
1. What are the expectations regarding the backing/reversal of the money creation?
2. What is the marginal propensity to spend of the first receivers of the money?
3. What proportion of the money spent will be on consumption, investment or asset purchase?
4. If the money created is spent on asset purchase by the state or central bank what will be the effect of this on the time profile of future balance sheets of the state or state owned enterprises (including the Central Bank)?
5. What proportion will be spent in the domestic currency and if not what effect will the spending have on the current account (imports exports).
This is a five dimensional spread of monetary effects not one dimensional and spending by central bank or state is second order and can any combination of effects on the above depending on the historically contingent legal framework and institutional design. What this framework shows is how narrow concepts like ‘ricardian equivalence’ are, as this for example imagines holding 2-5 constant and varying only one, in which case and only in which case Woodford’s argument that QE has the same effect as helicopter money applies. Clearly helicopter money could have much greater impact as it gives greater control on the first use of the money created, for example it could be used to finance infrastructure investment/improved education which could permanently shift the economy onto a higher growth path. Consider a central bank that buys corporate bonds in a company that builds a railway, is this monetary policy or fiscal policy?
It is the potential power of helicopter money however that creates fear that it will be inflationary – unless there is a cast iron guarantee that it will be reversed. Of course some expectation of non reversal is required for any policy to bite, but the policy maker cannot be prescient and the purpose of a shift in policy is to shift expectations.
Simon Wren Lewis considers the issue of whether any state would keep its part of the deal in net destroying units of account to purposively negate any net creation of units of account through helicopter money, for example to counter inflation.
If the government cooperates, this is no problem. The government just ‘recapitalises’ the central bank, by either raising taxes or selling more of its own debt. Economists call this ‘fiscal backing’ for the central bank. In either case, the government is taking money out of the system on the central bank’s behalf. So the nightmare that makes helicopter money taboo is that the government refuses to do this.
The lack of a guarantee, or independent Central Bank control over this is part of the institutional monetary regime and can be changed.
I see three mains ways that this could be done.
1. The state holds its account at the central bank. A law could be passed so that if the Central Bank wishes to cancel helicopter money then state deposits at the central bank are redeemed at less than par until the helicopter money is reversed, at a rate and par of the independent central bank’s choosing.
2. Money can be stamped with a central bank set redemption rate at banks, the Central Bank would be given powers to alter this redemption rate including through setting down time based depreciation (very Gesell flavoured solution).
3. Money would be created with a central bank stamp and the the Central Bank would be given powers to determine that at a point it sets it could only be redeemed to pay taxes and could not be recirculated. Net tax repayment over government spending being net destruction of the unit of account.
None of these are impossible and the first would be trivial, it could be offset by fiscal policy pulling opposite to the actions of the Central Bank but unless aligned any policy re money is ineffective anyway.