Winner of the New Statesman SPERI Prize in Political Economy 2016

Sunday 20 September 2015

Haldane on alternatives to QE, and what he missed out

Andrew Haldane, Chief Economist at the Bank of England, gave a typically well researched and thoughtful talk recently. The main subject matter was the problem of the Zero Lower Bound (ZLB): why we may hit it much more often than we would like, and why QE is not a great instrument for dealing with it. To quote:
“QE’s effectiveness as a monetary instrument seems likely to be highly state-contingent, and hence uncertain, at least relative to interest rates. This uncertainty is not just the result of the more limited evidence base on QE than on interest rates. Rather, it is an intrinsic feature of the transmission mechanism of QE.”

In the past I have emphasised the point about lack of evidence simply because it is obvious. But as Haldane’s discussion shows, the problems are more basic than that. Some people argue that we can always get the result we want with enough QE. Yet if the central bank and the public never know how effective any amount of QE will be, then lags make it a poor instrument. It is refreshing to see a senior member of the Bank finally acknowledge its limitations.

Haldane considers two alternative ways of dealing with, or avoiding, the ZLB: a higher inflation target and getting rid of cash so that negative interest rates of whatever size become possible. The first is obviously welfare reducing, but as Eric Lonergan argues the second is likely to be as well. (See also Tony Yates.) But what is really strange about Haldane’s analysis is what is missing from his discussion.

One omission is a discussion of the possibility that targeting something other than inflation might help. The other omission is any discussion of helicopter money. There are some basic contradictions in the Bank of England’s views on helicopter money, but because central bankers tend to talk to each other I suspect they remain concealed. One argument is that helicopter money will somehow reduce confidence in the currency, but then the Bank seems happy to research getting rid of cash and imposing negative rates on money as if this is all about technicalities. [Postscript - meant to link to John Cochrane's discussion, and here is a reply by Miles Kimball.] I should have referenced  Another argument is that helicopter money will threaten the Bank’s independence because it will have to rely on government to (if necessary) recapitalise it, when at the same time the Bank has already obtained an underwriting guarantee for losses on QE. Also strange is the argument that independence will be threatened once the Bank does a 'helicopter drop' because governments will want the money for themselves, as if politicians had not noticed the amount of money being created under QE. After all Jeremy Corbyn's proposal was a response to the reality of QE, not the possibility of helicopter money.

The really ironic argument is that helicopter money is too like fiscal policy, and that there should be democratic control over fiscal policy. This is what central bankers mean when they talk about blurring the lines between monetary and fiscal policy. The argument is ironic because I am sure that if you actually asked most people which they would prefer - being charged to hold money, 4% average inflation, or occasionally getting a cheque from the Bank - the answer would be emphatic. So we rule out helicopter money because its undemocratic, but we rule out a discussion of helicopter money because ordinary people might like the idea.

There is also an element of hypocrisy. It is sometimes argued that helicopter money is unnecessary because it has a very similar impact to conventional fiscal policy. This is true, but it deliberately ignores the fact that governments around the world have gone for fiscal contraction because of worries about the immediate prospects for debt. It is not as if the possibility of helicopter money restricts the abilities of governments in any way. If governments undertake fiscal stimulus in a recession such that helicopter money is no longer necessary, it will not happen.

So it is good that some people at the Bank are thinking about alternatives to QE, which is a lousy instrument with unfortunate, and potentially permanent, distributional consequences. It is a shame that the Bank is not even acknowledging that there is a straightforward and cost free solution to this problem. My last two posts have involved defending central bank independence, but with independence comes a responsibility not to exclude discussion of particular policy options simply because they break some kind of taboo.      


  1. I think an estimate of the welfare costs of 4% inflation instead of 2% would be useful. I think that it is almost impossible to make up an economic model in which they are non-negligible and I only include the "almost" because it is always possible to get any result at all from an economic model with the right assumptions.

    People hate inflation because they consider the word to mean price increases for given nominal income (this is absolutely clear from uh you know asking them). This is not rational at all.

    I think respect for Democracy above can make one reject a 4% target and caring more about a utilitarian target than Democracy can make one support Central Bank Independence. But I also think that to support an independent central bank with a 2% target one has to assume that the people are always right *and* that they can't be trusted to manage the country's affairs.

    Also I don't think it makes sense to just accept the widespread view that inflation is terrible and reject the equally widespread view that budget deficits in a depressed economy at the ZLB is terrible.

    Can you explain why you think the welfare costs of 4% inflation are not negligible ?

    It's not as if I have anything against helicopter money. To me "it's just like stimulatory fiscal policy" = "it's just what all developed countries need right now". On the other hand, I see no drawbacks of a 4% inflation target.

    Whence came 2%, and was he a lunatic close associate of Ayn Rand who refused to even consider the possible advantages of maybe regulating banks a little ?

    1. Inflation is never an even flow of purchasing power on the economy, so that when it goes higher, it means wider fluctuations in relative prices; then presumably gives more room for a resource misallocation. This goes on top of the mere distributional effects of the inflationary tax on the relative cash holdings of the rich & the poor, as the leads and lags on factor income.
      The 2% is an update to the former price stability target (which meant 0% inflation), and I presume it was the most that a master of this craft like P. A. Samuelson could admit to deal with sticky prices without the dangers of indexation, hence to keep peace within the Neoclassical synthesis.

  2. Isn't it odd how arguments against an economic policy in the press and politics, which is surely the culture Haldane is worried about offending, are dubbed ‘economically illiterate’, rather than ‘economically innumerate’?

    It’s as though Haldane can’t do the numbers because he has found an argument or arguments which cannot first be put into words without offending the usual suspects.

  3. I do like Haldane’s argument that where the central bank has difficulty raising inflation, the solution is a higher inflation target. That’s a bit like saying that where a car won’t do more than 30mph, the solution is simply to announce it can do 70mph. Or perhaps I’ve missed something.

    1. «where the central bank has difficulty raising inflation, the solution is a higher inflation target.x

      Amusing, but only valid if "inflation" is taken to mean "wage-inflation". Because asset-inflation has been roaring ahead at fantastic rates.

      As Osborne and Cameron promised, by pushing down wage-inflation with fiscal and other policies, they are "pushing" the bank of England to counter that with phenomenally loose monetary policy, plus with even looser credit policy.

      Since (in current global conditions) monetary and credit policy have limited impact on wage-inflation, and a huge impact on asset-inflation, pushing down wage-inflation fiscally can result in enormous boosts to asset-inflation, as intended.

      The wise and fair philosopher-kings at the bank of England can then claim that their hands in this are tied by their duty to hit the inflation target. And M King at one point did make veiled remarks that this makes the bank look like it is redistributing income upwards. But it is not difficult to notice that the bank is far more explicit warning about potential policies a bit outside the establishment consensus than actual policies that are in it even in extreme form. :-)

  4. In a recent post on the ineffectiveness of QE as illustrated by Japan, Paul Krugman concluded 'When you print money, don't use it to buy assets; use it to buy stuff'.

    Richard Murphy has taken this as implicit support for PQE but it also applies to 'helicopter money'. In both cases, the macroeconomic effect works through 'buying stuff', either by govenement or by consumers. Both blur the line between monetary and fiscal policy.

    The differences are the respective merits of public v private expenditure, expected multipliers and speed. PQE addresses the public investment gap but 'helicopter money' offers more immediate impact. They have more in common than you want to accept.

    1. That's just fiscal policy I.e. MMT. All govt spending is creating money. Tax destroys money. Borrowing is swapping one type of money for another that pays interest.
      They just want fiscal policy but not decided democratically ;)

    2. Lyn: If you read to the end of this

      you will see that I agree, so I think your last sentence is wrong. The problem with Corbyn's QE was always the implicit threat to central bank independence. However as John McDonnell has said he wants to retain independence:

      hopefully we can now move on.

    3. Good, I'm happy to withdraw that sentence, as I'm keen to establish as much common ground as possible amongst opponents of austerity. On PQE, while I see QE and an NIB as mutually supporting, I do not want them tightly coupled. The NIB needs a mandate to resolve long-standing public investment gaps and should not be dependent on shorter-term monetary policy considerations.

      John McDonnell's position appears to be close to my own. Like John, I accept independence but want the mandate reviewed. I would add more transparency (already much improved) and accountability, plus readiness to use reserve powers to overrule the Bank in emergency. John's also right to draw attention to the excessive powers of the Treasury.

  5. Uhm I though that that standard argument against "helicopter money" in the form of "occasionally getting a cheque from the Bank" is that it might be used to pay down debt instead of increasing spending, and thus has a pretty low multiplier.

    That seems to be the argument that in a recession, even a balance sheet one, deleveraging is a bad idea and what is needed is bigger, cheaper leverage.

    The problem with that is that is the argument by M Pettis that in a balance sheet recession deleveraging is inevitable, and what matters is who pays the price for it and how soon. The answer to the very good question:

    «if you actually asked most people which they would prefer - being charged to hold money, 4% average inflation, or occasionally getting a cheque from the Bank»

    depends crucially on that. The current answer of the Osborne-Cameron government is that deleveraging should be paid for by working and unemployed wage earners via lower earnings and social insurance, so that rentiers who speculate on margin be protected from that deleveraging, and that wage-deflation and low interest rates are the way to achieve that.

    1. To be clear, I was commenting on the body of the post, but also on the preceding comment that "'helicopter money' offers more immediate impact".

    2. Public investment will have a higher multiplier but that from 'helicopter money' will also be well above zero. It's important that public investment delivers real value as well as a macroeconomic boost, so will take time to ramp up effectively and is not ideal for 'fine tuning' except on the margins. It should be possible to hand out money quite quickly, although apparently Gordon Brown looked at this option and found that we lacked the mechanisms to do it fairly.

    3. Lyn - if you have a reference for the comment on Brown I would be very grateful for it.

    4. «Public investment will have a higher multiplier but that from 'helicopter money' will also be well above zero.»

      But that multiplier depends a lot on the details. For on whether it is 1,000 or 5,000, or 50,000 pounds transfers, and on what it gets spent on in which part of the UK.

      For an awful lot of people reducing interest rates payments is the first priority, as interest rates are so high: I recently saw on the London Underground an advertisement for payday lending at a 753% (seven hundred fifty three percent) AER. Only fraudulently insolvent banks can borrow direct at near 0%, and only leverage property speculators can borrow at 3-4% with the excuse that the property is safe collateral. Poorer people typically have very high borrowing costs.

      For other people £1,000 could be spent on an imported gadget, £5,000 could be saved, and £50,000 could be used to double or triple the investment in a few years by using it as a downpayment on a property in the SouthEast.

      In Greece in the 2004-2012 period the government handed out "helicopter money" amounting to roughly 10-20% of GDP yearly, or say on average £10,000 euros a year per family, and it seems that it was mostly spent on imports (and temporarily higher employment in import-related jobs, including massively increased immigration).

      How much "helicopter money" handed out to UK families would be spent on domestically-produced goods and services rather than debt repayment, speculation or imported stuff is a good question, but I am a lot less optimistic that «well above zero» means "not far from 1".

      Something like "helicopter money" has been handed out for nearly 30 years in the South East, in the form of tax-free effort-free government sponsored capital gains on property, from around £10,000 a year on 2up-2down properties in working class estates to £40,000 a year in London more recently.

      Yes, a significant part of it has been spent on locally, for example private school fees, but also on property enhancing work, much to the benefit of local solicitors, architects, estate agents, but it also resulted in much greater imports of foreign goods (iPhones...) and services (sunny holidays...), but also for example as massive immigration of polish plumbers, czech electricians, bulgarian builders.

      Presumably a lot more of public investment, especially if outside of the overheated South East, would be spent, and spent locally.

    5. B, this is the idea of the Job Guarantee. Money goes to where people live rather than everyone living on top of each other.
      Introducing LVT and JG would significantly reduce regional inequality.
      It ain't hard.

    6. «a significant part of it has been spent on locally, for example private school fees»

      For an illustrative tale of how some crucial parts of the contemporary british economy works this is one of my favourites:
      «Certainly, we overstretched ourselves when we bought our lovely period home for £419,000 in 2002. [ ... ] The valuer had barely been in the house for five minutes yet we were able to borrow a further £80,000.[ ... ] we weren’t spending the money on expensive designer clothes, luxurious holidays or flash cars. Much of it was going on school fees and upkeep of the house.
      By the beginning of 2008 we had remortgaged three times, taking out a staggering £500,000 loan on a house that wasn’t worth much more. Our interest-only mortgage payments had soared to nearly £3,000 a month.»

    7. "Lyn - if you have a reference for the comment on Brown I would be very grateful for it."

      Apparently Alastair Darling seriously considered issuing helicopter money in 2008. But his civil servants told him that it would take 8 months to organize. In the end they reduced VAT because that was quicker.

      That is what Adair Turner said in a Positive Money presentation about "Making money work" a couple of weeks ago.

      However, QE only happened in March 2009, so 6 months after the Lehman collapse. SIn other words, had the goverment started to organize helicopter money in September 2008, even if it had taken 8 months, the QE programme might not have been necessary.

      (Unless, of course, QE was untertaken with the main aim to provide liquidity to the bond market. Interestingly, Carney is currently trying to establish whether bond investors and traders would be prepared for a downturn and a liquidity crunch in the bond market. There was an article today about it in the Sunday Times)

    8. Simon, I came across Brown/Darling's consideration of this option in Anthony Seldon's 'Brown at 10'. Unfortunately I returned this to the library a few days ago so I can't give you a page reference. As Matt says, reducing VAT was chosen instead.

  6. Why pay people to borrow money? Why the obsession with injecting money via govt lending and not govt spending?
    This game of changing interest rates to get people to indirectly borrow money for something is silly.
    The standard MMT position of leaving rates at zero and using fiscal policy - I.e. govt spending is "printing money" and tax is "unprinting money" seems more sensible, and easy to explain to the electorate.

    1. «Why pay people to borrow money? Why the obsession with injecting money via govt lending and not govt spending?»

      it is not quite «govt lending» but making private banks lend as much as possible to to private borrowers, that is ensuring that leverage is ever increasing and ever cheaper.

      "Private Keynesianism" (well identified and named by C Crouch) is in part a form of arbitrage like the Private Finance Initiative, more precisely "idelogical" arbitrage.

      The arbitrage is between the idea that government debt and spending is "inflationary" and "distortionary" while private spending and debt is neither, because of arguments similar to the Efficient Market Hypothesis.

      So the "bond market vigilantes" punish with high interest rates borrowing by governments but don't care about levels of private debt. Because markets.

    2. «govt spending is "printing money" and tax is "unprinting money"»

      Only in a purely closed "temple money" (in the felicitous naming by D Graeber) system, that is a purely government-chartalist one. In that system "spending" means creating liabilities on the "temple" ledger and "taxing" means canceling them.

      But in most economies that system is not the only one or even the dominant one. Imports as a rule cannot be paid in "temple money" in most countries, and there are capital flows, and banks are "temples" like the government. Then things are not quite as clear as some MMT people think. As Minsky pointed out, creating money is easy, getting it accepted by vendors is the difficult part.

    3. (This is Random, for some reason cannot login to Google)
      "getting it accepted by vendors is the difficult part."
      Then they don't get to sell their goods and their economy shrinks. Why would they do that when it costs nothing for the central bank to swap the currencies?

    4. «"getting it accepted by vendors is the difficult part."
      Then they don't get to sell their goods and their economy shrinks.»

      This has happened a lot of times in history: vendors prefer to build up stocks than be paid in money they consider worthless. The germans have learnt this very well, perhaps too well, in the post-WW2 period.

      «Why would they do that when it costs nothing for the central bank to swap the currencies?»

      Perhaps the venezuelan central bank could answer that :-).

    5. Agreed, but my point is foreigners are saving. Govt deficits need to offset this excess saving.
      Just don't pay them interest and prevent them from owning things beneficially.
      There is no reason that a float cannot be managed properly, IF you have competent people in charge.
      Fixing the rate does nothing to help, and can lead to worse problem.
      Our Morons lend to inject "liquidity" in the forex market and allow foreigners to buy London property and pay them to save (HALF of Gilts to foreigners!!)
      Remember the world as a whole is a closed system and to weaken one currency strengthens another, who respond with fiscal stimulus and/or weakening their currency.
      Weimer and Greece both have significant foreign debt.
      "Perhaps the venezuelan central bank could answer that :-)."
      It's a poor example. If you have overall bad terms of trade and bad management.
      But in extremis, introduction of import controls to allow what you need is important and useful tool.

    6. B, I get that our leaders in power have mismanaged the float. That doesn't mean it couldn't or shouldn't be managed correctly.
      Here's Neil on the subject:
      "the threat of the imposition of import controls and capital controls - imposed, in extremis, to slow the change so that the economy has time to adjust to a lower currency level - should be enough to control things via expectations.

      There is nothing unusual about this. Stock Exchanges have timeout periods and rivers have flood barriers. It's a perfectly sensible shock response - certainly more sensible than putting up interest rates."
      Banning bank lending for fx speculation in addition to this would be good reforms to introduce.
      This would allow a bear squeeze that pushes the currency back up.
      But I doubt they would be implemented.

  7. I am in favor of everything but the current regime where Bernanke tapered too early. I am in favor of helicopter money, PQE, 4 percent target, NGDP path level targeting, fiscal policy etc.

    In the U.S. context, Fed independence has led to the worst recovery on record. Only the ECB makes the Fed look good by comparison. So maybe they shouldn't be so "independent." But the recovery hasn't been bad for everyone. Cui bono?

    The central banks had to resort to QE. What was the alternative? But from my point of view they did the weakest, most half-assed QE possible. Because the convention is that central banks don't mess with long-term rates.

    Instead of buying a certain amount of assets each month, why not do with long term rates what they normally do with short term rates and target them outright? Wasn't that done in the past?

    Because that would give the game away. Only the bond vigilantes can discipline profligate governments by controlling long-term rates. If the government could control long-term rates - wasn't QE supposed to lower them? - then the bond vigilantes wouldn't be so scary.

    So another option would be to do QE like you were serious about it.

    1. The central bank conventions are so that the government intervenes as little as possible in the private sector. Certain political interests want it that way and want it such that private sector power (business leaders) set the macro tune. See Kalecki.

      These past 40 years have shown us where that leads us. The Wicksellian natural rate goes lower and lower; wage stagnation and increasing inequality to levels surpassing those of the 1920s. It's undemocratic and that's dangerous.

    2. «Because the convention is that central banks don't mess with long-term rates.»

      They do that in spades, by keeping wage-inflation low. Because amazingly long-term lenders don't care about asset-inflation, which matters a lot to them, but only about wage-inflation, which matters a lot less, and that offers an enormous arbitrage opportunity that first-world countries have been exploiting for a long time.

      «Only the bond vigilantes can discipline profligate governments by controlling long-term rates. If the government could control long-term rates»

      Two of the never-mention-those topics in modern economic policy are the foreign balance and the exchange rate. If those don't matter then governments can control long-term interest rates. If they matter then foreign lenders matter.

      As always, MMT shows that the government can issue as much money as it wants and does not need to borrow in its own currency, and if it does so is for political reasons. The problem as Minsky said is getting it accepted by vendors; in particular by foreign vendors.

  8. If I was running the government and my central banker told me that the tools he has to do the job - QE - don't work very well I would replace him with a central banker who was confident he could do the job of maintaining price stability and low unemployment.

    1. But in the UK case you would have to give him the tools to do so i.e. the authorisation and means to do helicopter drops

    2. True, but that is considered "fiscal policy" is it not?

  9. In respond to the forex concerns, this is a good article explaining the MMT view:

  10. Really enjoyed this post. Thanks.
    I'm sure helicopter money is taboo for some but there must be others at Bank of England thinking about it. Adair turner is rebranding the idea to overt monetary financing in his new book if I correctly understood a recent presentation he gave.
    I think another aspect of the problem is central bankers thinking they can judge what is a politically feasible idea. Which is well outside their remit.

  11. I'm all in favour of a "helicopter drop" give (say) a £1000 to someone in poverty they sure as hell need it and will spend it, give it to someone already wealthy and it means next to nothing. Perhaps we could link it to the electoral roll, only get your money if you're on it, might increase the number of people who vote.

    1. «£1000 to someone in poverty they sure as hell need it and will spend it»

      Oftentimes the poor have very expensive debts and paying interest on them takes a large chunk of their income and the best thing they could do is pay off at least part of that debt. This may free part of their income for spending with lower interest payments, but not as fast as just spending the £1,000.

    2. There would also be an effect on spending as they wouldn't need to expend as much money on paying down debt, as well.

  12. Just a question. Yesterday, Paul Krugman claimed that QE is bad for bankers:

    His view on the distributional effects of QE is very different from yours. Is this due to the US and UK contexts being different, or are there other reasons?

    1. It depends on the bank. The return on an asset is the sum of the income (interest payment, dividend) plus the capital gain. Income is normally positive while the capital gain is zero for an asset of fixed value (reserves, unsecuritised loans) but for an asset of variable value (equities, bonds, securitised loan) may be positive (if the rate of return is falling) or negative (if the rate of return is rising).

      Hence the impact on a bank of a rate rise depends on its asset mix. For a commercial bank with mainly fixed value assets, it will be positive as the income change will dominate the capital losses but for an investment bank with a high proportion of variable value assets the capital losses are likely to dominate the income gain. QE was the reverse of this. So both Paul and Simon can be right.

  13. How would a helicopter drop actually be implemented?

    1. Couldn't the central bank just credit everyone's bank account with the appropriate sum?

  14. Why would a higher but stable inflation be "obviously welfare reducing"?

    Won't salaries, pensions and so on automatically keep up through collective bargaining and indexing?

  15. Correct me if I'm wrong, but isn't a recovery defined as ABOVE trend level growth which makes up the ground lost in the recession?

    As far as I can see, whichever set of data you look at, this simply hasn't happened. There simply hasn't been a recovery. And this is the economic performance that Osborne likes to boast about.



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