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.
