My ebay copy of Azariades’ ‘Intertemporal Macroeconomics’ arrived in the post today, and, excitedly thumbing through it, trying to work out what had caused the previous owner to scrawl ironic exclamation marks, or underline, I stumbled on a paper by Philip Weil from 1987 I had not known about before. It’s about the value of money and how it relates to trust in the value of money tomorrow. The model is an overlapping generations model, where money is a store of value. People in the model have in their minds that there is some probability that, for reasons unspecified, money won’t have any value tomorrow. For people to accept money today in return for their goods or labour, the probability they have in their heads that money has no value tomorrow has to be sufficiently small. You could characterise the debate about whether helicopter money would be an appropriate response to being stuck in a liquidity trap as revolving around what the loud noise of the blades chuffing overhead would do to this subjective probability. Could such drops be adequately embedded in existing monetary and fiscal institutions and declared objectives that trust is not materially eroded? Or would they blow it? As I said before, right now I don’t think it’s worth risking to find out, as we have other levers to pull. But this Weil paper was, I thought, a nice way to think about the dilemma.
Recent Comments
Tony
In that model what would the difference be between agents who thought there was a low probability of future money having a nil value and those who thought there was a high probability of money having a slightly lower value (same expected value for both groups)?
Regards
Roy
If you mean: rather than having all agents maintain that there was a low probability of money having no value at all, what if we had them place a higher value on money having some, but a reduced value? Honestly don’t know.
That’s what I was wondering: whether there would be a threshold where helicopter money becomes bad or a continuity. You might take a risk with an experiment if you weren’t faced with an uncertain cliff-edge.
In that model why would people be more concerned if the money expanded by 5% per anum through heli’s when compared to say asset purchases? Why would a heli be of greater concern than an asset purchase? If people are receiving the newly inflated money supply they should be less worried if the money lost some of its value.
In the paper I talk about, nothing is happening with monetary policy. It’s just a fact that if this probability gets above a certain threshold, money has no value today. I’m speculating that this probability might be a function of monetary policies. Asset purchases (of gilts at least) are not much different to conventional open market operations. They were done declaring that they would be reversed. But who knows. The point of the post really is that I happened across a new formal way to think about it. In the MIU/CIA models, the formal way to think about the issue was as to whether money should be modelled as redeemable, and whether we should assume it posesses utility yielding qualities independent of pecuniary returns.
People get quite upset by goldbugs. The smartest goldbugs I’ve known though explained their understanding of gold as a portal asset, through which you can carry value from one monetary (and political) regime to another. I wrote a (bad) piece on this a few years ago to rationalise a gold holding in uncertain times. It sounds like the Weil paper could be the (unlucky) grandfather of this idea.
Put the book in the bin (and all the others with “formal” models in), Tony. They were all written by academic economists who did not feel the need to understand central bank balance sheets.
The value of currency is underpinned by the inflation target. If that is upheld, the entire stock of base money can be withdrawn smoothly without any loss of real value, if necessary. But for the central bank to be independently able to perform that operation, it needs to be solvent. Of course even then there are no guarantees that the central bank will be inclined to fulfil its promise – look at the lack of grit on the BoE’s MPC. But clearly helicopter money, meaning an addition to the central bank’s base money liabilities without an increase in its assets, handicaps the central bank’s ability to fulfil its promise, so the probability of the promise being fulfilled is a little lower. And, if the central bank does not have the solvency to fulfil its promise, your next line of defence is the government, so the holders of base money must judge their integrity. That can be interesting. I suspect that the value of the US dollar has been a little supported by the influence of right wing Republicans like RIck Perry, who have at least criticised Bernanke’s easing and made it difficult to go as far as he might have liked. Sadly the UK’s regard for sound money is very shallow indeed.
What that that several-layered assessment means, unfortunately, is that it is difficult to know what the reaction to helicopter drops would be. They would be prohibitively risky to try.