This article was written in 2013, at a time when the concept of « helicopter money » was much less publicized than it is today. Although the concept is now mainly used to describe « distributing cash to citizens, » we must not forget the other possible interpretations of this concept. This article reviews the various policies associated with « helicopter money » in its broadest sense and describes the specific debates surrounding it.
Abstract:
– Cooperation between the central bank and the treasury in the form of monetization of debt specifically generated by a government stimulus plan seems to be the most desirable application of the concept of « helicopter money. »
– The concept of helicopter money, due to its various interpretations, raises many debates: money creation without asset purchases in return, negative capital for central banks, independence of central banks.
– The effectiveness and applicability of this policy still need to be debated in order for a viable consensus to emerge.
Part 1: One concept, two interpretations:
Is it possible for a central bank to distribute money « for free » to the citizens of a country in order to stimulate demand? Well, in theory, yes, and this is what some economists refer to as « helicopter money. » Others use this expression to refer to another form of policy: an operation in which a state would pursue an expansionary fiscal policy financed entirely by its central bank through monetization of the corresponding debt.
In both cases, the conclusion is the same: this type of policy appears relatively atypical at first glance. The debates it raises (money creation without asset purchases in return, negative central bank capital, conditional independence of central banks) seem almost absurd at first glance. However, new contributions on this concept are appearing these days: one need only look at recent articles on the Financial Times blog to realize that helicopter money is a concept that, in the winter of 2013, is back in vogue. The purpose of this article is to clarify this concept and discuss the debates surrounding it.
The concept:
The term may seem confusing at first glance, given the multiple uses of the term « helicopter » in monetary debates.
For example, the term « helicopter drop » has often been used to describe the actions of major central banks during the current crisis, namely that they have « dropped » money into the economy. This metaphor is often used in relation to « pure » quantitative easing[1], where the aim is to increase the monetary base by any means necessary: it is as if the central bank were « bombarding » the economy with money from its helicopter.
Patrick Artus refers to « helicopter money » as « money creation without asset purchases in return » (Artus, 2012) (definition 1). Authors such as Waldman (2013) use the same definition. There are several concrete examples of this, as we will see below, one of which is mentioned above: every citizen of a state would receive banknotes from the central bank, without having to pay anything directly in return. Here we see the difference with quantitative easing: this is a « distribution » of money and not an injection of money with the purchase of assets in return, as is the case with quantitative easing.From a balance sheet perspective, this will result in an increase in the central bank’s liabilities without a corresponding increase in its assets. This then raises the issue of central bank accounting (negative capital in particular), as explained below.
Another definition proposed forhelicopter money is that put forward by Buiter, for example, and used in many research papers. This assumes that the government will distribute money to citizens (or reduce taxes, which is conceptually the same thing) or finance investments as part of a coordinated policy with the central bank « The treasury will implement a tax cut or increase in transfer payments and will finance this by selling debt to the Central Bank. The acquisition of Treasury debt by the central bank is financed through the issuance of base money » (definition 2). This concept is synonymous with » Overt Monetary Financing » (OMF). The debate raised by this solution concerns the independence of central banks, as the monetization of a government’s debt by a central bank is generally perceived as tangible evidence of a lack of independence on the part of the monetary institution.
Two definitions for the same expression: who is right and who is wrong?
While this difference in definitions may be a source of confusion, going back to the origin of the concept, we realize that both specifications are acceptable despite the fact that they do not correspond exactly to the same operation.
The helicopter metaphor comes from Milton Friedman, in his book « The Optimum Quantity of Money. » He uses it at the beginning of Chapter 1 when he attempts to explain, using a simple example, why money is neutral in the long run. He uses the image of a helicopter flying over a country to distribute money to agents, who would suddenly see their monetary assets double. Friedman’s metaphor therefore describes a situation in which a country’s economic agents would find themselves with newly created money without any other variables having fundamentally changed. Whether this money passes through the government with the cooperation of the central bank for debt monetization or whether it comes directly from the central bank is not the issue. From this perspective, it is clear that the two definitions proposed above are consistent with Friedman’s original metaphor.
In fact, some authors use the second definition, specifying that the first defines an operation that is impossible in practice. This is the case with Buiter, for example, who explains that the central bank cannot create money and distribute it since it is not, by its nature, supposed to take on the roleof fiscal agent, which remains the responsibility of the state. Grenville (2013) argues that « central banks have no mandate to give money away, » in other words , that money creation without asset purchases in return is not possible for a central bank (legally or « ethically, » the author does not specify his thinking). However, this is precisely an argument that Patrick Artus does not seem to accept, for whom « the theoretical reasons why banks create money only in exchange for asset purchases are therefore unclear. » This argument seems to be echoed by Steeve Waldman, who argues that central banks could easily adapt their accounting systems and create, for example, a purely fictitious asset called « goodwill » (meaning goodwill or desire for success, depending on the translation) in exchange for this new money. The semantic debate is therefore based on profound differences in conception.
Helicopter money in practice:
Helicopter money can be implemented in various ways:
– Canceling part of the public debt held by the central bank, which amounts to writing a check to the Treasury, which uses it to repay the debt owed to the central bank (thus falling under definition 1). Would this be an effective policy? If the aim of this policy is simply to reduce the government’s debt (which would be a short-term illusion[2]), the direct consequences on aggregate demand seem highly uncertain (what would be the transmission channels? Confidence? Hard to imagine, given the ink that such an operation would cause to flow in the media). Above all, this measure could undermine the credibility of both the government (signaling indiscipline) and the central bank. In light of these arguments, it therefore appears to be the least attractive of the measures.
– Monetize the Treasury’s debt corresponding to the financing of new projects (e.g., infrastructure). This is undoubtedly the most likely application if a helicopter money policy were to be implemented, as it seems to be the « most plausible among the implausible » applications. This would require monetary and fiscal cooperation, as advocated by McCulley and Zoltan (2013) in particular and Martin Wolf (2013), as well as a shift in current monetary thinking.
– Distribute money to all households, or only to the poorest households (which are more likely to consume this surplus), in the form of checks with a limited lifespan, for example, as proposed by Samuel Brittan, in order to be more certain that the money created will be spent. The consequences for the economy would be guaranteed in the medium term in the event of an overall increase in spending. However, the feasibility of this solution and the details of its implementation remain to be worked out (to my knowledge, there are few articles on this specific subject).
– Introduce tax cuts for households, financed indirectly by the central bank. Would the savings generated for each individual be spent (since that is the aim)? Nothing is less certain, and we can therefore certainly rule out this solution.
Conclusion
Once the definition of helicopter money has been established as we have done here, many debates arise: Can a central bank create money without purchasing assets in return? Can a central bank have negative capital? Could partial monetization of debt as part of a policy of cooperation between a central bank and its government prove problematic? These theoretical debates have not yet been sufficiently discussed, as is clear from the differences of opinion in discussions related to helicopter money (see references in the Financial Times or McCuley 2013, for example).
Once these debates have been clarified, the question of the effectiveness and implementation of this solution in the current context could be addressed much more calmly.
Could a helicopter money policy prove to be the ideal solution in the current economic context, where the usual quantitative easing policies are struggling to succeed, particularly due to widespread deleveraging in the private sector? In any case, more and more voices are being raised in this direction.
Notes:
[1] The term quantitative easing can be interpreted in several ways. By « pure » quantitative easing, we mean here the creation of money « for its own sake, » where the central bank sets itself the sole objective of increasing the monetary base regardless of the counterpart. The English equivalent would be « bank reserve policy. » From this perspective, the Fed’s « QE 1 » after the 2007 crisis is not really QE but is closer to a « credit easing » operation. See Borio and Disyatat (2009) for the semantic debate.
[2] Helicopter money, in this context, would lead to a decrease in the central bank’s capital. In theory, the central bank would therefore have to rebuild its initial capital level, which would mean not redistributing its annual profits to the Treasury. Each year, the government would therefore have to borrow the money that was previously provided by the central bank’s profits. The government’s implicit debt would therefore remain unchanged under this policy!
References:
– Artus (2012), « The full range of possibilities for central banks, » Flash Economie No. 186
– Borio, Disyatat (2009) « Unconventional monetary policy: an appraisal, » BIS Working Papers
– Buiter, Willem H. (2007), « Seigniorage, » Open-Assessment E-Journal, 2007-10. http://www.economics-ejournal.org/economics/journalarticles/2007-10.
– Financial Times: « Helicopter money is purely about initial stimulus » Feb. 2013, « Helicopters can be dangerous » Feb. 2013, « UK needs to talk about helicopters » Oct. 2012, « The case for helicopter money » (Martin Wolf) Feb. 2013, « Come on Bernanke, fire up the helicopter engines » (Brittan Samuel) 2012, videos « Time for helicopter money, » http://video.ft.com/v/1938690861001/Time-for-helicopter-money
– Friedman, Milton (1969), « The Optimum Quantity of Money, » Chapter 1 in Milton Friedman,
– The Optimum Quantity of Money and other Essays, Aldine Publishing Company, Chicago, pp. 1-50. Pages 4 to 7
– Grenville (February 2013), « Helicopter money, » www.voxeu.org
– McCulley Paul, Pozsar Zoltan (2013) “Helicopter Money: or how I stopped worrying and love fiscal-monetary cooperation”, Global society of fellow
– Waldman Steve (February 2013) « Monetary policy for the 21st century » on his blog www.interfluidity.com
Julien Pinter
