Following a speech
by one of the front runners to replace Mervyn King as Governor of the Bank of
England, there has been renewed talk about helicopter
money. Helicopter money involves
the central bank printing money, but that in effect is what Quantitative Easing
(QE) does, so what is different about helicopter money?
There seem to be two rather different things that people might have in mind.
The first difference is where the money goes. QE, in the UK
and to some extent in the US, involves the central bank printing money to buy
government debt. Helicopter money is like the central bank sending a cheque to
everyone in the economy. The second difference is whether the creation of new
money is permanent or temporary. QE, if you ask central bankers, is temporary:
when the economy picks up and there is the first sign of inflation, QE will be
put into reverse (except, just maybe,
in the US). Helicopter money is thought to be permanent: the central bank is
sending out cheques, not loans.
Let’s take the permanent/temporary issue first. As I have
argued before, calls for money creation to be permanent are in effect calls to
increase inflation above target at some time for some period. The reason why most people believe QE is
temporary is because (with the possible recent exception of the US Fed) central
banks are sticking firmly to their inflation targets. There may be very good reasons why central banks should instead allow inflation to exceed those targets as the economy recovers. But if this is the issue,
why not just call for higher inflation? Surely it makes sense to be explicit
about what is trying to be achieved, particularly as the benefit involved in
higher inflation for the real economy comes from increasing inflation
expectations. We gave up money targets long ago, and quite rightly so. For the
central bank to destroy some proportion of the government debt they now own and
just hope this gave them the amount of extra inflation they desire would be
like going back to money targets.(1)
The first issue, of where the money being printed is going,
is more interesting. It reflects an understandable view that it would be
better to print money and give it to consumers who would spend it (helicopter money), rather than using it to
buy government debt (QE) which may
reduce long term interest rates which may
help stimulate the economy. The second route has been tried and has not been that
successful, so why not try the first route?
It is useful to think about the circumstances in which the
two routes are exactly equivalent. To focus on this, let us assume helicopter
money is temporary: the central bank sends out cheques, but the government says
it will get the money back in a few years time by raising a poll tax. (This is
like the proposal
from Miles Kimball.) If consumers are Ricardian, they will save all the amount of the cheque,
because only by doing so can they pay the future poll tax without cutting their
consumption. How will they save the money? Let us suppose they buy government
debt. Then this is exactly the same as QE, except that consumers hold
government debt temporarily instead of the central bank. This seems to be what
David Miles had in mind in the speech
that Stephanie Flanders refers to here, when he says: “If
helicopter drops of money are reversed when their impact shows up very largely
in prices and not in activity, the economic difference with conventional QE
largely evaporates.”
Yet we can now see why in reality the two may not be
equivalent, because consumers may not be Ricardian. In particular, some may
have been asking their local bank for a loan to buy a car, and the bank had
refused because it has become very risk averse since the crisis. For these credit
constrained folk, the central bank’s cheque is just like the loan they couldn’t
get. So they use the cheque to buy the car, and reduce their future consumption
to pay the poll tax later. Instead of buying government debt, they have
bought something real, which will increase aggregate demand for sure.
If this is the reason people call for helicopter money, then
I have a lot of sympathy but only one problem:
what difference
is this from an expansionary fiscal policy combined with further QE? Instead of
the central bank sending people cheques, the government can send the cheques using
money borrowed by selling debt, and the central bank can buy the debt by
printing money (i.e. QE). In this sense, helicopter money is just another name
for a fiscal stimulus combined with QE. We have the QE, so why not call for
fiscal stimulus rather than helicopter money?
Even without credit constraints direct transfers can have large efficiency effects. For example, if a transfer allows someone who could not otherwise make their mortgage payments to remain in their home, the deadweight losses from foreclosure (which are substantial, as much as half the value of the loan) are avoided. This can even benefit creditors - in fact helicopter money can facilitate implicit loan modification. Fiscal policy cannot do this except in a very patchy and piecemeal way. Infrastructure spending, for instance, will be targeted at some locations and industries and leave most debtors unaffected until the effects of the policy gradually permeate through the system. Unless, of course, the fiscal policy itself involves direct transfers.
ReplyDeleteMore generally, no two policies with different distributive implications can be equivalent with respect to their macroeconomic effects. Highly aggregative models assume away these distributional effects.
About the permanent/temporary issue, I don't see it. One could maintain an inflation target, and finance direct transfers by the sale of bonds (or the interest from bonds). You tolerate higher interest rates to maintain the given inflation target but counteract this with expansionary transfers. Why does the inflation target need to change?
> We have the QE, so why not call for fiscal stimulus rather than helicopter money?
ReplyDeleteThat's easy! Because consumers spend money on things that they want, whereas the government spends money on bridges to nowhere. Sure, from an aggregate demand viewpoint, these are equivalent, but from an aggregate utility viewpoint, there is a big difference. You may as well ask why US consumers don't donate their money to the government to spend for them.
Re-read the article. Wren-Lewis says the government would send everyone a check, not build a bridge to nowhere.
Delete> We have the QE, so why not call for fiscal stimulus rather than helicopter money?
DeleteFiscal stimulus is when the government increases public spending or decreases taxes to stimulate the economy. Helicopter money is when the central bank (Federal Reserve Bank in the U.S.), not the government, "prints" (creates) new money and puts it directly in the hands of citizens/residents to stimulate the economy.
So, the actors/mechanisms are:
1. Fiscal stimulus (fiscal policy): Government > Citizens and industry (the government spends on stimulus programs and/or lowers taxes)
2. Quantitative easing (monetary policy): Central bank (FRB) > Government
(the central bank purchases government bonds, so the government borrows money from the central bank and spends the borrowings to stimulate the economy)
3.)Helicopter drop (monetary policy): Central Bank > Citizens/Residents
(the central bank "prints" money and puts it in the hands of the people. The people then spend the money, thereby stimulating the economy)
1) QE buys current debt, helping holders of those bonds. Helicopter money is QE wth the fresh deficit, distributively neutral.
ReplyDelete2) Fiscal stimulus is targeted by the govt and faces public choice issues. Helicopter money is person-blind.
3) Though it ultimately comes down to what the monetary policy target of the central bank is, permanence of monetary increase is the default assumption in a helicopter drop. Reversal is the default assumption in pure QE.
Infrastructure spending etc. are RoI and 'role of the state' decisions and must proceed in a normal fashion, without AD management as an additional consideration. AD management best left to PAYE/ consumption taxes/ bank transfers, or something equally wide-reaching and distributively neutral.
1) Don't see large implications of this
Delete2) Fiscal stimulus could also be person-blind. See the comment above: "Wren-Lewis says the government would send everyone a check, not build a bridge to nowhere". More importantly, you can't have 'helicopter money' unless through the government (fiscal authorities). So the alternative described by SWL is not about who gets the money, but about how it is financed. Should fiscal authorities issue new bonds which the FED would buy back on the secondary market? (QE + fiscal stimulus). Or should the fiscal authority have a current account at the FED, where the FED would credit positive money balances in return for nothing? SWL asks if it make any difference.
Cash is not the form of money that matters in our modern economy. Credit - i.e.: numbers in bank accounts - is what matters.
ReplyDeleteTo stimulate the economy, we need to restore credit growth - so that the stock of credit keeps up with population growth, growth of economic activity and a low level of inflation.
Credit grows when borrowing exceeds repayment. Borrowing is normally stimulated by low interest rates.
However, low interest rates have not been sufficient to restore credit growth in the current environment of private sector deleveraging (the aftermath of a bubble in the private sector debt:income ratio).
That is why the government must step in with additional fiscal stimulus to restore robust credit growth. Government borrowing creates both bonds (debt) and bank deposits (credit).
The credit growth (a rise in the stock of money) will restore economic growth (a rise in the flow of transactions) and hence raise the governments tax revenue in the future - sufficient to cover interest payments on bonds.
It is a political decision as to whether the fiscal stimulus is spent on public spending or on a tax cut (or a mix of both).
The difference between Strategy (1) Helicopter Money, and Strategy (2) QE + dG=dB (where B = Gov. Bonds), is that the latter implies a higher public debt (although bought back by the central bank), and this would have an impact on expectations. And expectations are crucial.
ReplyDeleteFirst, markets participants will observe an increase of the debt/GDP ratio; the bond vigilantes) will not like it. Do bond vigilantes exist? Well, in the Eurozone they do.
Second, if you believe in non-Keynesian effects, the greater risks of your central bank turning like the BCE in the future, and thus the greater risks of future bond vigilantes action, macro instability and disruptions, may reduce aggregate demand today, even in countries such as US, UK, Japan.
Third: an increase in the supply of B will look like a temporary expansion, so Ricardian consumers will save a lot. On the contrary, an increase in M will look more like a permanent choice, a permanent expansion: similar to the first strategy plus the central bank burning its bonds (see http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/06/why-its-a-really-good-thing-that-the-ecb-has-overpaid-for-greek-junk-bonds.html ): thus Ricardian consumers will spend more now. And yes, inflation expectations will be higher. I know: in QE + dG the supply your ideal government announced that the current fiscal expansion (whether dB or dM) will be financed by a future poll tax (not by a future increase of the inflation tax). But I believe it is an unrealistic, ad hoc assumption. More likely, a real government would not explain how the current expansion will be financed, and anyway there’s uncertainty: so dM (as opposed to dB) would increase the probability that in the future the financing would come from inflation. Yes, I see that in Strategy (2) the dB element is only apparent, since it is held by the central bank, which is a public institution. But public perceptions count.
So in the end Mr. Helicopter Money would be much more powerful than Ms QE+dB in the Eurozone, and only moderately more powerful elsewhere.
I absolutely agree that helicopter money is QE plus fiscal stimulus.
ReplyDeleteI think the reason some people talk about helicopter money is because they live in the USA. They know that Congress will not approve any more fiscal stimulus (just the opposite) so they want the Federal Reserve to implement fiscal stimulus.
This would clearly be illegal under current law. Also unconstitutional under any law. I think the point is that those who advocate helicopter money wish the USA had a different fiscal authority, because the one we have is controlled by Republicans not named Bernanke.
You're mistaken. Singapore implemented a helicopter drop throughd transfers to household bank accounts, monetizing the resultant debt, about 2 years ago. One major central bank to discuss it was BoE, which released a discussion paper considering monetizing PAYE tax cuts, and finally concluded against it.
DeleteThere's a strong intellectual foundation behind the call for helicopter drops, which has nothing to do with the shenanigans of the US political system.
Helicopter drop is indeed QE + fiscal stimulus, but both are motherhood terms because of aggregation. As Rajiv Sethi points out, distribution matters non-trivially.
"the government can send the cheques using money borrowed by selling debt, and the central bank can buy the debt by printing money (i.e. QE)"
ReplyDeleteIn the U.S., the fiscal deficit is running about 8% of gdp. Growth in government ransfer payments have accounted for a large percentage of Disposable Income growth. Meanwhile, the Fed is buying the bulk of term Treasuries. How is this different than what Wren-Lewis is proposing?
ReplyDeleteHere is how to do a helicopter drop in the U. S. context. The President requires the Treasury to create 4 trillion dollars of coin signorage, delivers it to the Fed, and has the Fed mark up the Social Security Trust Fund by 4 trillion, giving the the Trust Fund a surplus of 6.6 trillion dollars. The President then goes to the Congress and asks "Why are we taxing employers and employees 10.4 % of every paycheck to bolster a retirement fund that already has 6.6 trillion dollars? Give workers and employers back their payroll tax. They earned it, let them spend it or save it, or pay down debt with it." Require that enabling legislation specify a target for re-establishing the payroll tax, perhaps in stages, as the U. S. reaches targetted NGDP growth. The pressure on Congress to do this would be strong.
One can look at this as debt forgiveness on obligations going forward. Of course, Bernanke could sterilize this move by raising interest rates, but he has been calling for help from Congress for some time, and republicans do like tax breaks.
It's only stimulus to the extent it circulates. So long as the Fed pays interest (>0) on Excess Reserves* while we're in a ZLB situation(r=0), you're not going to get a sustained multiplier effect.
ReplyDeleteYou can only throw money at the problem to the extent that money can solve the problem: A buys from B who buys from C who buys from D who buys from A, et seq. When the path is A buys from B who pays Jaime Dimon or Vikram Pandit's compensation for being Such A Great Leader, you accomplish less than the value of the coinage.
*I'll quibble paying interest on reserves, too--it's rewarding a bank for follwing the rules that enable it to be bailed out with impunity by idiots like Timmeh--but paying interest to encourage "intermediaries" not to intermediate is something that reeks of crony capitalism and/or the inability to do math. So long as the Fed insists on doing that, I'm applying Occam's Razor and declaring that the major U.S. banks are all insolvent.
This discussion detracts attention from the main macroeconomic question - what did induce the economic slowdown? Likely, the financial crisis was just one of many features of the economic fall. Currently, the treatment seems more dangerous than the desease, which in turn, is not clear.
ReplyDeleteArent unemployment checks an example of helicopter money? The unemployed are more likely to be Ricardian. The bigger challenge is to prevent moral hazards from popping up.
ReplyDeleteYes, in theory, HeliMoney and QE+dB are the same. The difference between those macroeconomic tools does not come from their function (which is the same), but from the people who hold them.
ReplyDeleteHeliMoney is printed by the central bank (an independent body with supposedly some economic knowledge).
In the example of SWL, HeliMoney can be reversed (if there is inflation) with a poll tax imposed by the Government (a political body, prone to electoral considerations, and whose economic knowledge is variable).
Fiscal policy is decided by the Government and may, or may not, be supported by the central bank with QE.
If there is no inflation, or if the economic situation is too bad, it is imaginable that the central bank simply cancels the gov debt.
In both cases, the outcomes may be the same (either a permanent or a temporary monetary expansion). But their likelihood is very much different.
The permanence of the monetary expansion looks much more likely in the case of HeliMoney than with QE + dB.
(Note that it depends on who sits respectively on the central bank and the government. It's long been assumed that central bankers are more conservative than governments, but that's an hypothesis that's been proved wrong in a very recent past.)
In practice, small nuances may have big effects, and this is why economic theory can never be taken without a pinch of salt.
Thanks for the explanation. I guess the term helicopter money has a different meaning than I thought.
ReplyDeleteSeveral years on, and on the brink of QE 2014: ECB, the above becomes more topical than ever in Europe. I haven't studied economics since A-Level. However, a few questions/observations:
ReplyDelete1). What evidence is there that the modern consumer/decision maker (I'm talking US/Europe here, where QE is topical) is Ricardian? Both corporate and personal indebtedness is at, or near, record levels. This surely indicates that consumers are, now, more than ever, less Ricardian? So, how does the effectiveness of helicopter money change if consumers are becoming less Ricardian (you only focus on the line of investigation supposing that consumers are Ricardian). Also, QE only finds it's way into the credit-worthy (an ever-shrinking) sector of the economy; i.e. more cheap loans for an ever shrinking pool of credit worthy lenders (in the private sector, at least), whereas helicopter money, in a diminishingly Ricardian economy, would have, arguably, more penetration than QE.
2). More importantly though, I perceive (forgive me - as I said, I haven't studied economics since A-Level) that using QE to simulate inflation towards long-term inflation targets, is causing large-scale distortion of the free market, and a complete decoupling of stock markets versus the real economy.
a). In my simple layman's world, there is little wage-growth expansion, and employment levels in Europe (especially the PIGS - who are, presumably, the main impetus for QE) and the US are still relatively poor, so why then do we need to artificially stimulate inflation, which simply serves to widen the wage gap?
b). Is deflation not a normal part of the economic cycle which the economy should be allowed to experience until such time where prices, supply and demand reach equilibrium? Presumably, Europe is experiencing deflation because supply of goods (it's particularly PPI and import prices that are struggling) outweighs demand for those goods?
c). Shouldn't deflation be allowed to persist until it finds a natural floor, rather than trying to promote credit growth, via QE, to an already leveraged (by historical standards) consumer?
d). Given that the pool of credit worthy consumers is also shrinking, does this mean that QE, each time it is performed (in an economy that does not appear to be de-leveraging - in the corporate nor private sector) has a lower 'penetration', because banks, although they have money to lend, have a shrinking pool of credit-worthy lenders?
e). Look at stock market growth versus real growth since the inception of central-bank intervention in Europe and the US - doesn't this say just about everything that needs to be said about the (non-)effectiveness of QE?
So, to what extent is stimulating inflation in a highly leveraged economy sensible central bank policy and, with regard to helicopter money (just as short term as QE, but with a greater penetration), assuming that consumers are becoming less Ricardian, would this not be a more effective economic stimulus, because of its potentially wider penetration, than QE?
* When I refer to credit-worth lenders, I actually mean 'borrowers/lendees'
ReplyDeleteIt's the second time I've read this helicopter money. I now fully understand what it means. Nice post and thanks for clearing things up. client experience courses
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ReplyDeleteLondon 2015
Helicopter money ensures money will be spent, and acts as a lubricant, especially to the extent it is "dropped" on the people who need it most. Much more efficient than funneling spending through banks or "perceived" improvements in lending conditions, etc. In hindsight, the US would have done better had it sent out a trillion dollars in checks to citizens (especially if directed toward those who need it) rather than propping up the banking system to save bondholders and stockholders.
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ReplyDeleteProfessor Wren-Lewis
ReplyDeleteThank you for this post and your clear explanations of Helicopter Money.
As you have noticed, it is the new hype in the euro zone. Thanks to it, ECB might proceed to the fiscal stimulus that governments can't engage because of constrained public deficits.