More on helicopter money, prompted by Simon Wren Lewis’ post, and exchanges with Eric Lonnergan and others in the comments appended to my last post on this.
First, responding to Simon. He says that I argue “that if the central bank assumes money is irredeemable, and starts printing a lot of it, people may stop wanting to use it. If they do that, it will no longer be seen as wealth.” Simon remarks: “This is real angels and pins stuff that can come from taking microfoundations too seriously.”
Most people won’t click through to my post, and if you read that paragraph, you would not get why I wrote the post, or what I think about helicopter drops and why. The message is: ‘Tony, taking a too-literal reading of the wrong microfounded model, decides helicopter drops won’t work, so don’t take him seriously.’
I’m against helicopter drops. That bit is faithfully got over. And I worry about them using three lines of reasoning.
1) OLG and ‘new monetarist’ models of money, in which money is not redeemable. But in which we can show that some monetary policies generate money that has value, and some [like excessive money creation] destroy it.
2) casual historical empiricism that money’s value has been destroyed by excessive money financing.
3) I look at Buiter’s proposal to take the standard non-microfounded model of money [which assumes money has liquidity services, and that at the end of infinite time is redeemed] and to remove the redeemability assumption. And decide that it doesn’t get us closer to deciding what theory says would happen if there were helicopter drops. Why not? Because this begs the question about why we should assume money has those liquidity services.
Whether 1) and 3) should be part of the calculation to helicopter money in or not depends on whether you want to use theory to answer the question.
Simon goes on to say: “Just ask yourself what you would do if you received a cheque in the post from the central bank.”
This urges us not to worry about trying to find a theory to guide us about whether money will be felt as wealth or not. It just is, isn’t it, by introspection. Well, no. Sure, I can get the answer from myself that I will go ‘wtf is going on with policy now, are we really this far up sh!ts creek? Whatever, I had better try to spend it’. But figuring out what happens next, in general equilibrium, whether people would feel more wealthy or not, and whether this amounts to a worthwhile policy or not, is much harder. Which is partly why theory and empirics might be useful.
Simon then says: “As Nick Rowe points out in this post, we can cut through all this by noting the link between money creation and inflation targets. The money required to sustain an inflation target will not be redeemed, so it can be regarded as wealth.”
If this is intended as a point of theory, (I’m not sure whether it is or not) then it’s not right. And if it isn’t intended as theory, then redeemability is irrelevant. To explain.
Intended as theory: if we think theory is useful, we have two choices of model. We might decide to consider only overlapping generations or new monetarist models. If we do, then the thinking they do to the effect that money is not redeemable is pointless: in these models it isn’t, period. The question is how different monetary policies (eg different amounts of helicopter drops) affect the value of money. Some preserve it, and some, we know, destroy it.
Alternatively, we might consider models like the one Buiter studies, and doctors, these being models that assume liquidity value of money, and either assume redeemability, or don’t.
But neither does the Simon-Nick thought process make sense for this model.
Which assumption we make, whether you go with Buiter or not, is a once and for all decision about what the public sector budget constraint looks like out into infinite time, period. Given this choice about the appropriate way to view the constraint placed on governments, one then figures out optimal monetary and fiscal policy (and what that means for the sequence of money and bonds and taxes that appear in the sequence of budget constraints each period). Or one says ‘what happens if the government attempted to follow such and such a monetary and fiscal policy, say involving an inflation target of y per cent?’, and then works out the same sequence. In trying to work this out, one might find that certain combinations of candidate inflation targets and fiscal policies are not feasible. To repeat, as a mathematical matter, in describing a working artificial economy, we don’t say ‘we can dispense with the redeemability assumption because all money created in pursuit of a given inflation target won’t be redeemed’. In fact, in the redeemability version of the model, we never get to the end of time, and so money might (depending on choices/outcomes for m) never actually be redeemed!
If Simon and Nick’s remarks are not points of theory, then redeemability is not something to concern ourselves with. Instead, we would forget about it and turn to empirics to figure out what would happen following a helicopter drop.
If you are still with this post, further points are made in the exchanges around the notion that helicopter drops in pursuit of an inflation target need not generate hyperinflation and the corresponding destruction of money’s value.
Perhaps! But perhaps not. For example, the inflation target in the UK is a very fragile thing. The Treasury can change it whenever it wants by writing a letter. It did already once, to change definition (or was it to create a bit more inflation through the back door?). It could do it again. (After all some, like Krugman, Blanchard, Summers (and me) have been urging that this is a good idea, in case the natural rate will be very low for a while. ) It can even take back control over monetary policy for short periods if it wants to. Or for longer periods with a vote in Parliament. The entire BoE act could be repealed by a simple majority. So I don’t view the inflation target as a cast iron protection against helicopter drops undermining monetary and fiscal policy. There’s a good reason why monetary financing is outlawed by the Treaty of Rome. Allowing yourself tightly regulated helicopter drops is not time-consistent. Once government gets a taste for it, how could it resist not helping itself to more?
Simon, Eric and others might be right. It could work safely. But what is the point of taking the risk, when there is ample room for more fiscal stimulus of a conventional sort that leaves our monetary and fiscal affairs intact? Or for more unconventional operations exchanging reserves or short-dated gilts for private sector assets? If we were at 150% debt/GDP, or over-extended as far as QE or credit easing was concerned, I might be prepared to countenance it. But now, this debate seems frankly, well, academic!