Don’t call the helicopters yet!

This prompted by twitter commentary on Buiter’s recent paper explaining why helicopter drops will always work and stimulate the economy;  a formal paper echoing the call for money printing by Mark Blyth and Eric Lonergan in Foreign Affairs.

Buiter’s paper conducts surgery on the modern monetary DSGE model.  The surgery appears to make the model more realistic.  In the original, it’s assumed that somewhere off in the infinite recesses of time, the government will pay back all outstanding bonds it has issued, but will also redeem money it printed for real consumption goods too.  In this way it’s policies are set to satisfy the public sector intertemporal budget constraint.  Buiter says:  no one seriously believes the money is going to be ‘redeemed’.  So let’s remove that assumption.  His model retains the rest of the original machinery, notably, the ASSUMPTION that for some reason unspecified, holders attach a non-pecuniary benefit to holding money.

In the old model, if the helicopters rained down government bonds on the populus, said populus would think:  ‘hang on, these are not net wealth to me [HT Barro], because sooner or later they are going to be paid back out of my taxes.  Similarly, in the old model, if the helicopters rained down money, people would say ‘the government is going to have to pay for this gift when it redeems the money from whoever has it, and I will be taxed for it’.  In the new model, Buiter makes money net wealth in a way that it wasn’t previously.

Actually, that wasn’t the whole story.  In the old model, what people would say when money rained down on them would depend on whether we were at the zero bound or not.  If we were, at that point it would be the case that people already had sufficient money that the non-pecuniary like they had for it would have been exhausted.  This benefit is assumed to capture money’s function as a convenient medium of exchange. And the idea is that beyond some point, it’s useless to keep your wealth in money [perhaps even costly].  Once that benefit disappears, interest rates have to be zero:  this measures the opportunity cost of holding money, which has to be equal to its benefit.  If you are still with me, this means that whether money has any effect or not will hinge on whether at the zero bound people view it as net wealth.  And if they don’t, because it is to be redeemed, they won’t spend as though it were.  This is how Buiter gets his stimulatory effect.

This sounds like a triumph.  A more realistic model, showing how helicopter drops can stimulate?  Not so fast.  Forget the real world for a moment.  In the model world, we have just assumed that people value money for its own sake [to capture a parable about how they would value its convenience].  And as modellers, this seems ok either because we feel, or from other work we can derive, that this convenience value will emerge attached to an asset that is redeemed.  Once we take away the redemption assumption, it begs the question why the convenience value as a medium of exchange is there.  After all, the real story of paper money was that it was once redeemable, and that was why it became an acceptable medium of exchange.  So, as modellers, we ought to feel very uncomfortable about Buiter playing fast and loose with the government’s intertemporal budget constraint.  [Actually, some modellers, the ‘new monetarists’ like Williamson, Wright, Lagos, Kiyotaki, go ballistic about this mainstream model of money for the simple assumption of convenience value regardless of whether money is in the government budget constraint or not].

You might say:  but what about the real world?  Surely no-one thinks money is going to be redeemed do they?  Surely despite this they will always place a convenience value on holding money?  Well, maybe, or maybe not.  Maybe once helicopters rain down money, people will think that the UK or US governments will get a taste for it, will think that we have become ‘like Zimbabwe’ and run for gold, or other metals, or even, as in revolutionary France as their currency got debased, wine and cheese.  What about the law of legal tender?  Someone once said to me in the Bank of England that the reason why money has value is because of the law of legal tender.  [Which stipulates that a debt is to be considered closed if settled with, legal tender].  This has a grain of truth in it, but a lot of falsehood.  The law of legal tender, and the widespread use and acceptance of pound coins [first draft wrote pound notes, revealing my age] are symbiotic facets of our monetary system, and the former doesn’t solely determine the latter.  I’ve no doubt that if the government started debasing the currency, dollarisation would ensue here as fast as could be, and the law of legal tender would not matter at all.

This leads me to be strongly against helicopter drops of money.  I don’t buy the model-based explanation, because Buiter’s removal of the ‘redeemability’ characteristic of money leaves the model begging too many questions about why money is valued at all.  And I think the doubts we can tell about such a model connect to practical concerns we might have about the real world, that such drops would completely undermine the monetary system, not save it.

This tale has a cross-over with the early part of the story of quantitative easing in the UK, in which I was a junior civil servant writing confusing memos not that dissimilar to this blog post.  It became clear to me and others that most if not all of those who were deciding at that time didn’t know about the redeemability assumption explicit in the models.  (I’d gone a large part of my time at the Bank not grasping it myself, and had to be talked through it by cleverer colleagues).  They scoffed at it when it was spelled out to them.  Their view was:  well, the real world isn’t like that, so pumping all this money out there via QE will work.  This is why the early communication on QE, and even now the educational material the BoE produces on the topic, stressed the monetary ‘injection’, and why there was no sweating about what assets to buy or that the MPC itself should decide this.  If the only point was to get money out there, buying the assets was just a detail that functionaries in the BoE could carry out, not a policy decision.  Only later, as evidence mounted that money expansion was immaterial, and buying duration in gilts was highly material, did the language, and eventually the policy behind QE, change.

Once again you might interject and say:  Tony, they were right, redeemability was false, wasn’t it?  Well, who knows.  But whether they really understood this or not, the BoE ditched redeemability in their hearts, but still kept on working with a model that had it, but yet had to be then doctored with judgement to superimpose a stimulus they thought money would give that wasn’t there in the model itself.  (There was none of the internal consistency, however questionable, of Buiter’s paper).  So their forecasts were based on a  fundamental, technical hotch-potch, assuming as it did that the stimulus would work through just like any other, when interest rates were away from the zero bound.  But actually, in truth, the BoE were flying completely blind, and all the paraphanalia and whizz-banginess of the DSGE based forecast, which might have comforted some, was [actually, still is], on this account, something of a smoke and mirrors show.


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37 Responses to Don’t call the helicopters yet!

  1. David Comerford says:

    “Buiter’s removal of the ‘redeemability’ characteristic of money leaves the model begging too many questions about why money is valued at all” – What about the Kiyotaki Moore story

    • Tony Yates says:

      There a few models which generate, rather than assuming a value for money, including the one you point to [I hinted to this effect in listing Kiyotaki in my comment about how the new monetarists get angry about it]. But the problem is Buiter’s model doesn’t encode any of these stories. He just sticks with the assumption that money is valued for its own sake, and removes money from the intertemporal budget constraint. Hence why I don’t buy the policy prescription that helicopter drop would work.

      I haven’t seen an analysis of helicopter drops at the zero bound in a ‘proper’ model of money.

  2. Tony Holmes says:

    Has any country tried helicopter money in the last 70 or 80 years, and, if so, what were the consequences ? ( I have seen references to Japan and New Zealand having experimented in the 1930s, but I don’t know if this is really the case )

    • Tony Yates says:

      I don’t know, I’m ashamed to say. I think you could view the exchange at parity deals on German unification, and on the Invasion of Iraq [old dinars of doubtful future in Kurdish controlled Iraq held during Saddam’s reign exchanged at par by new western controlled central bank on his deposing] as helicopter drops. You need to ask Forrest Capie or Niall Ferguson.

  3. Tony – This is a great post, which clarifies a lot for me. My problem is with the analytical approach to money in prevailing models.

    We need to start by being clear about what money is, what exactly are we dropping from helicopters:

    1) There is a unique thing in the economy, called “money”;
    2) It’s defining value is that you can pay for things with it – as Friedman says: fiat money has value because other people think it does (a network effect);
    3) It has other, secondary (although often unique) characteristics: it is an asset with zero nominal volatility & zero credit risk;
    4) specifying that fiat money is irredeemable is actually a rather odd. Fiat money is, of course, irredeemable. In the same way that a chair is irredeemable – because it is not a debt (debts have been used as money – that’s a separate issue).

    If we accept that 1-4 define money, the models appear to assume no money. It is therefore not possible to model the effects of helicopter drop – we are dropping something which does not exist in the model.

    Alternately, let us introduce into the models a thing, created by the government, which has a value to recipients/holders (despite being irredeemable!). This thing is unique because it can always be used to purchase any goods and services in the economy, or to settle debts, pay taxes, etc. We need such a thing, and it has network-based monopoly characteristics.

    If we introduce this thing to the models – which is currently absent – I suspect the effect of sending more of this thing to the household sector will depend on two things: 1) how much and how they spend it – do they purchase goods or repay debts etc. and 2) what happens to the price level.

    The remaining significant question, therefore, is does such a thing exist?

    I think it does. I have some in my wallet. It will never be redeemed (that doesn’t even make sense – I wouldn’t even let anyone try to “repay” me!). And I can buy things with it in unique conditions – an extremely useful property. I could borrow some more at close to zero interest rates, but I don’t want to: if I borrow money I do not believe that my wealth has risen. If however, the government offers me a gift of cash – which I can refuse – I would accept it. That is why transferring cash to households has an obvious effect, including at the lower bound.

    • Tony Yates says:

      I don’t really follow.
      I’m not going to die in the ditch for these non microfounded models of money. There are many more, that do the job properly, trying to explain how 2) comes about, without seemingly assuming it.
      What worries me is that Buiter would have us believe that in doctoring this pretty bad model to get rid of an apparently unappealing assumption we have got closer to the truth. We haven’t.
      A model that is equivalent to the class I spoke about in the post is the cash in advance model. In this model, not only can you pay for things with money, but you have to.
      But this has exactly the same implications as the one I spoke about. I’m not sure, but I suspect, that suitably Buitered, it would admit of effective helicopter drops too.

  4. Nick Edmonds says:

    You say that removal of the redemption assumption brings into question why people value money. Do you mean why they might value money as opposed to bonds, say? Or do you mean why they might value any financial asset at all, if its value is linked to the currency rather than real goods? It reads like the former, but I’m guessing you mean the latter.

    • Tony Yates says:

      I mean: why should there be an assumed non-pecuniary benefit to money, where there is no such benefit to other goods (or at least less of one, in a slightly richer model) if the paper printed literally has no redemption value. Many models address this, and show that we can coordinate collectively on valuing worthless bits of paper. But these equilibria are delicate. Buiter’s analysis hacks one piece off a very unrealistic model, hoping to make it more so. But I don’t think he succeeds.

  5. Nick Rowe says:

    Assume all money (and bonds) will eventually be redeemed for goods, if it helps salve theorists’ consciences. But at what price?

    Suppose the government will redeem all the money in the year 9999, at a price Pm. So the price level in 9999 will be 1/Pm.
    Now suppose the government permanently doubles the stock of money by helicopter, and at the same time announces that Pm will be halved. So the price level in 9999 will be doubled.
    That should double the (flex-price) equilibrium price level in 2014, regardless of “liquidity trap”.

    To say the same thing another way, helicopter money is only truly permanent if the central bank increases the price-level path target (or NGDP level path target) in proportion to the increase in Ms at the same time.

    Us Market Monetarists have been discussing this recently:

    What are we getting wrong?

    • Nick Rowe says:

      (My thought-experiment leaves the rest of the government budget constraint unchanged, since the real resources needed to redeem the money in 9999 are unchanged. So helicopter money is a freebie, which is what it is supposed to be.)

    • Nick, can you explain what you mean by “redeemed for goods”?

      • Nick Edmonds says:

        Maybe “redeem” is the wrong word, but it is being used here simply to mean cancellation for consideration. So in the context of central bank money, this occurs for example whenever the private sector buys bills from the central bank, involving the writing down (cancellation) of a reserve account balance. Rather than giving consideration in the form of bills, Nick is imagining it is given in the form of real goods. Clearly there is no redemption written into the terms of money – it can only happen by consensual exchange – but his scenario sort of assumes that this happens at the end of the world, at which point no-one would want to hold money anyway.

      • Nick Rowe says:

        Eric: I think Nick E explains it. For example, everyone has to return all their old notes to the central bank, and are given gold (or silver, or iron, or land, or wheat, or cars, or a bundle of real goods, or whatever) in exchange. Then the central bank starts again, with a new currency.

    • Amongst other things, if the central bank engages in helicopter drops it is rational to expect LOWER future taxes, because growth is likely to be stronger (and tax revenues higher). It is of course logical to assume that helicopter drops would only be deployed when there is demand deficiency. This also explains why the temporary/permanent obsession of some economic theorists is an irrelevance. No one knows (nor do they care) if helicopter drops are “permanent”. It’s not even clear what that means – they are not tax cuts. There is a separate, complex issue of the duration and magnitude of the change in base money. Future demand for the monetary base is completely uncertain and not obviously important in assessing the effects of helicopter drops. In the conditions where helicopter drops are required there is likely very little impact from the rise in base money on the supply/demand of credit or market interest rates.

      • Tony Yates says:

        It’s not rational to expect lower taxes unless growth is stronger, but it’s precisely whether and why growth is stronger that we are scrutinising. You can’t assume this effect and then work back from it to look at the consequences for the budget, and then say ‘it will be thought of as net weath because it reduces taxes’.

  6. maruku says:

    Shame there’s no way of telling whether HMT repaying it’s BoE Ways and Means facility in ’08 had any effect.

    Agree it’s hard to draw strong conclusions from what happens without (or with) assuming money can be redeemed – especially in the context of quasi-fiscal policy, since you can always use the government’s money to pay the government’s bills (i.e. taxes or public service charges). But I do think it’s a good idea to be worrying about ways to strengthen monetary policy transmission mechanisms other than the price and availability of collateralised lending.

  7. dsquared says:

    I am all about giving economists a hard time for unrealistic assumptions, but I don’t have much problem with the redemption of money for goods and services. Isn’t this what chartalism is all about? Governments provide goods and services, and they always accept their own fiat currency for payment of tax bills. In large part, that’s why people held Zimbabwean dollars at all.

    • Chartalism is at best bad economic history. Even if it was good history, it is irrelevant to the prevailing value of money. As Friedman rightly says, money has value because others accept it as payment. Most would have value in zero tax world. Private moneys exist and have existed. The problem with the notion of “redeeming” money is that it conflates a ‘good’ – money, with a liability – debt. Because money is not a liability, helicopter drops create wealth and spending power. It would be best if money was actually modelled as a good produced by government at zero cost. To clarify the difference between debt and money: money CANNOT be redeemed. Otherwise it is not money.

  8. The following passage of Tony Yates’s makes me wonder how much of a grip on reality he has:

    “what about the real world? . . . . Maybe once helicopters rain down money, people will think that the UK or US governments will get a taste for it, will think that we have become ‘like Zimbabwe’ and run for gold…”.

    Well the answer to that is that the UK and US governments HAVE “rained down money” and no, people have NOT CONCLUDED that we’re going to be a Zimbabwe.

    So, game, set and match to Buiter and MMT.

    • Tony Yates says:

      This is a strange comment.
      Buiter examine a gift of money. Central banks have undertaken an exchange of money for gilts, at market prices. In Buiter’s model, the two would be different experiment. He’s not writing his paper to show the theoretical effects of what central banks have done: he’s writing it to demonstrate that what they haven’t yet done would work, at least in theory

  9. dannyb2b says:

    “After all, the real story of paper money was that it was once redeemable, and that was why it became an acceptable medium of exchange.”

    Money is not redeemable by the CB but it is redeemable for goods and services provided by the private sector when money holders spend. Does this make sense? Holders of money will have their money in the future redeemed for goods and services whenever they spend it. But money is not redeemable from the point of view of issuer.

    Therefore heli drops work.

    • Tony Yates says:

      No. The private sector as a whole needs to be redeemed by the public sector, and this can only come from resources it’s taxed from the private sector previously, or will. When people buy goods with money from other people in the private sector, this leaves the private sector as a whole ‘long’ in money, and the new money holder then has to think about redemption. [At least, this is how the non-Buiter models characterise the situation]. In the real world, of course, things may be different, and helicopter drops may or may not have some effect, good or bad.

      • dannyb2b says:

        In reality if money is exchangeable its the same as if it is redeemable from an individual perspective. The new surpluss of money from heli’s will increase gdp and higher gdp will increase money demand meaning no longer a surpluss.

        A model may say different though depending on its construction.

      • Tony, I am afraid that if something is redeemable it is not money. What defines money is the property “means of exchange/payment”. Redeemable debts have been used as money, but that is irrelevant – it simple means they have functioned as money and also as debt. To put it at its clearest: how are cigarettes in a prison redeemed? And they definitively are money. I can only conclude that any economic model which makes money redeemable cannot cope with money, and can only cope with government debt. Therefore money is “made into” debt. In fact, Hendry’s recent lecture at the Nobel get-together is a perfect example of this.

      • Tony Yates says:

        As far as both theory and history goes, we have examples where intrinsically worthless/useless objects can serve as money, and we have examples where they don’t. We have theoretical analysis of where they do under some circumstances, but then lose the money role under others (eg exessive money-creation). History seems to broadly back up this theory, given the emergence of useless objects a money, and their frequent disappearance (dollarisation).

    • dannyb2b says:

      Redeemability may be necesary for money if the private sector was one entity. But since individually people in the private sector can exchange money for goods and services redeemability is irrelevant.

      • Tony Yates says:

        Theoretically, this is not correct. Ie the relevance of redeemability in these particular models doesn’t depend on the private sector being one entity.
        (At this point I’d point out again that there are models where non-redeemable money can come to be valued (OLG models of money, new monetarist models). But this value is not guaranteed to survive regardless of monetary policy and public finances.)
        If you are making a conjecture about the real world, well, who knows. But frankly, in the real world, as I said in the original post, I don’t think redeemability is that relevant anyway.

  10. Tony, the fact that historically some money was redeemable is not relevant to the definition of money. It’s redeemability may have contributed to it’s being accepted as a means of exchange, but it is not a necessary property of money. In the same way as containing tobacco is not a necessary property for prison money, although it may explain its origins. This not semantics. The thing we are trying to get at is a distinct good, the value of which resides in its acceptance as the means of exchange. In Varian’s terms its value requires a network effect, in Friedman’s “money has value because other people accept it”. The cause of acceptance as a means of exchange can be varied (law, supply constraints, security, intrinsic physical value etc.). But once anything becomes accepted as the means of exchange, in pure theoretical terms it becomes something beyond its original use. Hayek and Hume correctly observed that money appears to be a “spontaneous institution”. It has a unique, independent value (I have not read wholly convincing explanations of this value anywhere. I suspect the unique usefulness of money resides in informational uncertainty, including and beyond ‘coincidence of wants’ , and incomplete inter-temporal markets – but that’s an aside). The important point here, is that theoretical modelers seem to be denying the existence of this unique good/service. Clearly it is easier to model if we call it a debt (i.e. make it redeemable). But that is tantamount to denying its existence. Helicopters drops of something that doesn’t exist won’t have much effect!

    I also think it is most rational to expect helicopter drops to boost demand, and therefore to raise growth in an environment where there is a significant shortfall of demand. It follows simply from the fact that cash transfers boost households’ purchasing power. All the empirical evidence on tax rebates, which are the closest proxy, unambiguously show an increase in spending (the magnitude varies). Other effects, such as on the price level are highly uncertain: particularly at longer horizons if supply itself becomes a function of current demand. It follows that the most rational thing to expect is higher spending, and higher growth, beyond that …. not really rational to have an opinion.

    • Nick Edmonds says:

      Redeemability (in the sense meant here) may not be a necessary property of money, but it is a necessary feature of how money actually works in a modern economy. The central bank has the ability to redeem base money and there is an expectation that it will do so if required to protect the value of the currency. So, if the private sector suddenly decided it didn’t actually want to hold anywhere near the current levels of base money, the expectation is that the central bank would redeem the excess rather than have allow hyperinflation. In theory, if we moved to a cashless economy, this could involve redeeming virtually all base money.

      So it doesn’t require that money is redeemed, merely that it may be redeemed. This provides a much more powerful underpinning to its value, than simply the hope that others will continue to accept it in the future.

    • Tony Yates says:

      As I explained before, I don’t dispute that either theoretically, or historically, one can discover objects which, as a result of social processes, possess moneyness to one degree or another. Historically, it has been very important for most emergences of money that at one point it was redeemable. That might be irrelevant to how an object’s moneyness evolves in response to hypothetical future monetary/fiscal choices. Or it might not be. The purpose of the piece is to point out that you can’t use the standard model of money minus redeemability to make a case for helicopter drops. Doing so throws the spotlight on why money comes to be accepted, which is simply an assumption in this standard model. In other models, it’s not an assumption, it’s an outcome that happens under some conditions, but doesn’t happen under others. Money printing very often flips models from producing that an object that was valued as money, is no longer. Curiously, this is exactly what has happened in societies that indulged in great amounts of it historically too. Coincidence? Could be, but I doubt it.

      What you say ‘is most rational to expect’ is just a hunch. But I think you need more than that to fundamentally dismantle the institution and practice of monetary and fiscal policy. The weight of historical experience and theoretical evidence is all on the other side. That’s not proof it wouldn’t work, but it’s enough to persuade me that it would be extremely rash. I also think that the risk taken is pointless, since there are alternatives that have theoretical support, and, recently, have some empirical support too. They aren’t without risk too, but at least there is some evidence that they can work, as opposed to none.

      • dannyb2b says:

        “Curiously, this is exactly what has happened in societies that indulged in great amounts of it historically too.”

        But the quantity of money printing under heli’s would be regulated by the inflation target. So that cant be a problem. Nobody is saying to abolish the inflation target and do heli’s. Heli’s can be an instrument to more effectively achieve targets.

      • Tony Yates says:

        The inflation target would be some protection, since it was the objective of the helicopter drops; but I don’t think it would be bullet proof. The target itself is a medium run concept, so doesn’t have to be hit on any given year. And HMT can change it whenever they like, without anything more than a public letter. And for short periods HMT itself can take back control of monetary policy; and for longer periods can, with Parliamentary approval, retain it. If there were no alternative, I’d be prepared to contemplate this line of action, but since there is, I view it as a pointless and reckless act. In Japan, I’d think more seriously about it, where scope for fiscal stimulus might be limited, and there is a long recent history of deflation.

      • dannyb2b says:

        I agree but that’s an issue of accountability.

        We have two problems. Policy effectiveness and accountability.

        Greater policy effectiveness in attaining targets can be achieved by incorporating new tools such as heli’s.

        Under heli’s or QE or any form of policy targets may be not met for example by undershooting or overshooting of inflation. We do need greater accountability but that is a separate issue.

        I dont see how the central bank will stray from their inflation target so much as to collapse the monetary system because of heli’s. They should actually be capable of more effectively hitting targets because the general public have lower and more stable money demand than current central bank counterparties. As a result smaller and more stable expansions of money are required to generate inflation and growth when compared to QE.

    • dannyb2b says:

      “All the empirical evidence on tax rebates, which are the closest proxy, unambiguously show an increase in spending”

      What about increases in wealth and income? They would also be proxies.

  11. I agree that a model which explains why money is used and has value is missing. I’m not sure this is necessary, however. Money does have value, we know the consequences of producing too much (and we know how to shrink the monetary base – which involves no “redeeming”). But I find the suggested lurch from cash transfers to hyperinflation rather extreme. The cash transfer proposal Mark Blyth and I made requires a fraction of the money base expansion which has occurred under QE. So to worry about societal collapse from cash transfers you need a model which shows that QE has a small effect, but a cash transfer involving one-tenth the expansion of the monetary base has a huge effect. Is there one?

    Regarding my belief that the most probable effect of a cash transfer is increased spending, this is not a hunch (perhaps a truism). From a model perspective, all we need to assume is credit-constrained households (of which there are plenty in the Eurozone). A more general model only needs myopia and uncertainty. Equally important, all the empirical work on similar policies show an increase in spending. The empirical work on the Bush tax rebates are most relevant – they show exactly what you expect (i.e. low income families spend more). But the behavioural biases are widespread – it even matters what form the transfer makes, and the term “tax rebate” is itself framing!

    Going from cash transfers equivalent to 2-5% of GDP to hyperinflation or a collapse in the value of money seems very odd. The whole point is that independent central banks with inflation-targeting mandates would be making the transfer. The reason they need another tool is that it is all too apparent in the ECB’s case that deflation is the greater risk, and it may not have the tools to deal with it. I sympathise entirely, Tony, that optimal fiscal policy would be great. In the foreign affairs piece we effectively argue that a policy of cash transfers implemented by independent central banks is in fact optimal monetary & fiscal coordination.

    • Tony Yates says:

      Eric, there are models that explain why money is valued; and how that value emerges and is destroyed. I don’t claim that they are missing. An answer to this is missing from the monetary model Buiter doctors. The usefulness of these models, just like any theory, is that they help verify whether things we think intuitive would be borne out or not, at the cost of abstraction. So that’s the sense in which they are ‘needed’. It’s not enough to say ‘we know money has value’. Well, I also know that economies grow, but that’s not an argument against looking for a theory to help me try to figure out why.

      The evidence on tax rebates tells you what happens when you do a bond financed tax rebate. We don’t know what would happen if we did a helicopter drop.

      You seem to also want to think about doing a helicopter drop but rely on people thinking that you are doing a bond financed tax cut [reference to myopia, framing]? Not sure what you mean there. Your comment about credit constraints is actually not right: you don’t even need to have credit constraints. These are one example of an assumption that would help break Ricardian Equivalence and make a bond financed tax cut stimulative, without which it wouldn’t be. Going back to Buiter’s paper: there are no credit constraints there. This is why figuring out whether money or bonds would be considered net wealth is important. If you think they are, then you can dispense even with credit constraints. If you do think there are credit constraints (there surely are) then this begs the question why you want to consider helicopter drops at all. Since then you can get reliable fiscal stimulus without doing an extra-ordinary monetary policy operation.

      THere’s no theoretical support for your Foreign Affairs Claim that such cash transfers would constitute optimal mon/fisc coordination. Several papers by Benigno and Woodford go through some examples of what is, in a relatively standard monetary model. You could rely on arguing that the real world differs in some crucial way.

      Anyway, it’s been fun debating this.

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