Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday 8 February 2013

What is the attraction of helicopter money?

The reviews of the first episode of Mark Carney and the Treasury Select Committee seem generally favourable. Of course those wanting to see inflation targeting killed off right from the start were disappointed (as they were bound to be - you cannot kill an established star that quickly), but its demise has not been ruled out. From my point of view one of the real positives from the show was the evident desire of the new Governor to have a debate about the monetary policy framework, a debate which as I noted before has been largely missing in the UK. Martin Wolf, as ever, eloquently explains (£) the reasons why we need this debate, and I’m glad to see his suggestion that we might look at earnings growth as well as CPI inflation. To put the point strongly, one reason why monetary policy is currently so passive around the world is an unjustified obsession with just one particular measure of inflation.

Martin Wolf also says we need to talk about helicopter money, and the FT leader took a similar line the previous day. Here I admit I am conflicted. The macroeconomist in me wants to complain: as I have said in the past, helicopter money is either a plea for fiscal expansion - which is good, but why not call it that - or a policy for above target future inflation, which may also be good but why not call it that too? However perhaps I am being politically naive - maybe it is the only way we can get governments at the moment to undertake fiscal expansion.

Let me first summarise the macroeconomics as I see it. Suppose the government cuts taxes using new money created by the central bank (often called base money). This helicopter money seems formally equivalent to debt financed tax cuts, with the central bank buying the government debt through Quantitative Easing (QE), and then destroying the debt so it can never be sold. If so, helicopter money differs from tax cuts plus QE only in so far as the money creation with QE is temporary (the debt owned by the central bank is not destroyed), while with a helicopter drop it is permanent. With temporary money creation (QE) it is possible to claim that future inflation will not be allowed to exceed the target, because the central bank is free to reverse QE as much as it needs to. Standard macro would suggest that a permanent increase in base money will raise the price level eventually, so it may no longer be possible to prevent inflation exceeding its target at some point.

Is this standard macro right? I think many get confused by discussion flipping from prices to quantities or vice versa. They may think that the central bank can always raise interest rates to keep inflation in check. But just as in a free market the apple producer cannot flood the market with apples and keep the price of apples high, the central bank cannot flood the economy with money and keep interest rates high. It cannot independently control base money and short term interest rates.[1]

That is the macroeconomics as I see it. What about the naive part. First there is a standard point. A central bank could promise to raise inflation in the future, but will it keep that promise? There is a time inconsistency problem here, which I have talked about before. Perhaps we need some device to force the central bank to make good on raising future inflation, and printing money now might be just that device. In that sense, helicopter money may be a more effective means of increasing future inflation than raising the inflation target. However, if that is the argument, it is better to be honest and call for helicopter money as a means of raising future inflation. The FT leader I mentioned appeared to suggest the opposite.[2]

Second, perhaps this is all about fiscal policy after all. Governments have convinced themselves that we need austerity because government debt needs to come down, and helicopter money allows them to relax austerity without compromising on debt. Stop trying to convince governments they can be much more relaxed about debt in a recession, and let them use money creation as a way of getting fiscal stimulus. As long as there is not too much helicopter money, the increase in future inflation will probably be manageable and will help the recovery, so why quibble. But lets keep quiet about the future inflation bit - we do not want to put them off.

Which brings me back to Dr. Carney. Just imagine that the Chancellor told him over the next few months that he had decided to embark on a limited programme of helicopter money. The aim was to stimulate the economy, and the fact that the money was being used for tax cuts before an election was just one of those coincidences. As the Chancellor knew that Dr. Carney was in favour of additional stimulus, he was sure that he would be happy to go along with this. What would Dr. Carney say? Well we already know from episode one:

“with respect to so-called helicopter money, which was referred to there, I will be absolutely clear, I cannot envisage a circumstance where I would support that as a strategy”

Do I think these are the words of a seasoned central banker who is afraid to break a taboo? I suspect instead they are the words of a good macroeconomist who wants to call a spade a spade. If the Chancellor announced bond financed tax cuts, we know Dr. Carney would not object. If he announced a higher inflation target - well that is also a decision for the Chancellor and not the Governor. But announcing a policy that could severely compromise the future Governor’s ability to do what he is mandated to do, while pretending it does not - I think he has every right to object to that.[3]

[1] Perhaps the hope is that tax cuts financed by printing money will increase demand - because the government has not issued any debt which will require future tax increases to pay back or service (Ricardian Equivalence will not apply) - yet the central bank can still sell what assets it has to mop up the money created by the tax cut. But as this leaves the private sector holding the same amount of government debt as they would if the tax cut was debt financed, it is difficult to see how this trick could work.

[2] As I explained here, if helicopter money was expected to raise prices, consumers would need to save all the tax cut to preserve the real value of their money balances. However savings would still fall because higher prices at the zero lower bound would reduce real interest rates. So the policy is more expansionary because future inflation increases. Here is a closely related post.

[3] I cannot help noting, however, that to the extent that austerity involves price increases of some form, you could legitimately argue that the Chancellor is already making life rather difficult for the MPC. Here is a chart from a recent speech by MPC member Ian McCafferty [HT uneconomical]. The FT suggests the government’s increase in university tuition fees may add 0.3% to inflation both this year, and in the following two years.


  1. Helicopter money in not formally equivalent to a debt financed tax cut - unless there are lump sum taxes in force. In the UK there are few if any lump sum taxes and so a debt financed tax cut would be a give away to the upper regions of the income distribution. The attraction of helicopter money is distributional.

  2. Simon,

    "It cannot independently control base money and short term interest rates."

    Why not? Doesn't the BoE operate a floor system? What prevents them from changing the floor rate and doing QE at the same time? Of course, under those circumstances we have to stop even pretending that the QTM anchors the price level (but then it never really did, so that's a good thing).

    "Standard macro would suggest that a permanent increase in base money will raise the price level eventually, so it may no longer be possible to prevent inflation exceeding its target at some point."

    Not true in a floor system. The standard macro argument is based on logic that says that *eventually* the nominal natural rate will rise above zero and then the excess money supply will cause inflation by depressing the real rate below the natural rate. But in a floor system where you can *always* set the real rate arbitrarily high, this is not the case. Increasing the money supply depresses the nominal rate to the floor *not to zero*. So you can always control inflation.

    So the ability to prevent *deflation* is limited by the ZLB which is inescapable due to the existence of zero interest currency. But the ability to prevent *inflation* is limited only by the ability to raise the short rate. *That* in turn is not limited by the mere existence of money. It is only limited by our (former) insistence of setting the floor rate (IOR) at zero.

  3. At the end of the day QE in its present form isnot much different.
    -The sterilisation measures are so easily to counter theirselves via other measures.
    -Hardly anybody believes the CBs can sell the bonds back to the market even a lot of them donot see it happening over the longer term.
    Present QE looks like a sort half helicopter. In how far things are priced in is difficult to say there are so many influences, hard to quantify things.

    Next to being pretty uneffective. The money ends up with mainly financial investors and mainly lead to new bubbles and very little new jobs.
    On the other hand that confirms that under the present market conditions at least there is clearly room to do things. Seen as there is also a lot of deleveraging probably not a conclusion that will a necessarily always be the same. And marketconditions can change 10s times faster than measures to correct the new unstable situation.

  4. “helicopter money is either a plea for fiscal expansion - which is good, but why not call it that - or a policy for above target future inflation..” I beg to differ.

    Re the “plea for fiscal expansion”, helicopter money combines fiscal with monetary policy, doesn’t it? That is, if government prints money and does a helicopter drop let’s say via feeding the extra money to wage earners via reduce National Insurance contributions and increasing the state pension, that would be classified as “fiscal” had the money been borrowed. But given that “helicoptering” increases the amount of monetary base in the hands of the private sector, the latter gives helicoptering a monetary element, doesn’t it?

    Also I don’t see a strong connection between helicoptering and “above target future inflation”. One can go for “above target future inflation” via conventional fiscal or monetary policy, and at the same time, one can do some helicoptering in a responsible or non-inflationary manner, if the total amount of money helicoptered is limited.

    Re the para starting “Let me first summarise…”, I agree that helicoptering is the same as “fiscal plus QE”. However I don’t agree with the second half of that para where you suggest that helicoptering poses inflationary dangers because (unlike QE) it cannot be reversed. Helicoptering can be reversed by raising taxes and “unprinting” the relevant money (that’s a fiscal way of “reversing”). As for doing a “monetary reverse”, that could be done simply by the central bank wading into the market and offering to borrow at above the going rate of interest (even if the CB was not in possession of any government debt). That might not be legal under present arrangements, but the law can and should be changed if the change makes sense.

  5. Adair Turner advocates helicoptering, or what he calls “overt monetary finance”. See:

  6. "But just as in a free market the apple producer cannot flood the market with apples and keep the price of apples high, the central bank cannot flood the economy with money and keep interest rates high. It cannot independently control base money and short term interest rates."

    The central bank can however do something like let a part of the apples in the market suddenly rot, that is, increase the minimum reserve threshold for the commercial banks. Doing that it would diminish (or completely eliminate) excess reserves and therefore again be able to increase short term rate.

  7. I agree with K that short-term rates and the quantity of base money can be determined independently without any trouble if the central bank operates a floor system. In that regard, the "standard macro" clearly isn't right. That is not to deny that a large balance sheet can affect the central bank's income position and, ultimately, its incentives and credibility when it comes to fighting inflation. But there surely is no mechanical link from high base money to low interest rates, let alone high inflation.

    More broadly, I also dislike the muddied public debate about helicopter money. In essence, it is a fiscal expansion, financed by a reduction in the net worth of the central bank (which is of course part of the consolidated public sector balance sheet). Whether or not such an operation is dangerous depends on (i) how weak is the overall balance sheet of the public sector; and (ii) to what extent the weaker central bank balance sheet, per se, affects the central bank's ability and credibility in pursuing price stability.

    If there is little concern about (i) and (ii), helicopter money will provide effective fiscal stimulus. But then why not do it the old-fashioned way, by financing the stimulus through the budget, while letting the central bank stick to its usual mandate--a much cleaner approach from the viewpoint of accountability and transparency!

    Conversely, if (i) or (ii) give rise to serious concerns about currency debasement, caution is warranted. Moreover, those who would still advocate helicopter money in this case need to justify much better why the current modus operandi (with a formal separation between fiscal and monetary policy, even if the central bank decides to buy government bonds under QE) is no longer appropriate.

  8. I'm not sure that "helicopter money" is really the best option. It would mean that there is no control about where money goes. Why not use newly created central bank money to do useful things directly. The money could be used to pay nurses, doctors, teachers, policemen, firemen, for example. Or for infrastructure payments - building roads, public transport systems, hospitals, schools, renewable energy etc. Or it could be used to pay off government debt - which has cost UK taxpayers £495 billion in interest charges since 1995. These are all things that just about everyone in society would approve of. But instead of paying for it via taxation, or with Public Private Partnerships which will cost a fortune in the long run, just pay for it directly with debt free central bank money.

    1. Simon,
      Why is there “no control”? If the BoE MPC (or whoever) decide that £Xbn of helicoptering is in order, the government of the day then has a choice as to how to allocate that money. Assuming government of the day wanted to be democratic (howls of laughter), it would allocate the extra money in accordance with the wishes of the electorate as expressed at the most recent election: that’s very roughly half the money being used to boost public spending, and half used to boost private or household spending.

  9. This comment has been removed by a blog administrator.

  10. Mark Carney decent reviews for our further study.


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