You can’t have your helicopter money cake and eat high interest rates, Adair

Prompted by Adair Turner in an exchange on Twitter, I read this paper of his delivered to the IMF.  The paper is one to set current and former central bank pulses racing.

It’s a measure of how far the crisis has led some to think the previously unthinkable that a name mentioned as a candidate for the Governorship of the Bank of England is now writing forcefully about the advantages of helicopter money.  Even pushing it as an option to be preferred over debt financed fiscal policy and forward guidance.

The exchange with Adair was prompted by him pointing out that helicopter money was a less dangerous option for the economy than negative interest rates.  To my mind, this does not make sense.

Helicopter money leads to an increase in the supply of money and liquidity, and this will depress the price of money/liquidity, lowering the interest rate, in other words.  Put differently, the discount at which securities trade below face value will include compensation for the absence of liquidity, or moneyness.  But as money and liquidity become more abundant, money-like assets command less of a premium, and the compensation for its absence falls, raising the price towards the face value of the security, or, equivalently, lowering the interest rate.

Before the crisis, I would have doubted that rates would be pushed negative, even by large-scale helicopter drops.  But with Denmark, Sweden, Switzerland, the ECB and now Japan setting negative rates without dire consequences, I would not bet against it.  That detail aside, the main point is that you can’t control both the quantity and price of money at the same time, which is what Adair claims.

Actually, as put, what I have qwritten above is not quite right.  And in his paper, Adair notes that the central bank can require banks to hold reserves, and charge whatever negative rates it liked on those reserves.   However, this is just a tax, one that takes banks off their central bank reserve demand curve.  And one that won’t inhibit the injection of money through the helicopter drop from affecting the interest rates on all other assets, along the spectrum of liquidity from very close substitutes to central bank money, to more distant ones.

It will be those interest rates which will, subsequently, most meaningfully express monetary policy, and, since those are not monopoly-supplied by the central bank, the authorities have to live with agents being ON their demand curves for those assets, and, having affected the relative quantities through the helicopter drop, will have to live with the interest rates that emerge afterwards.

In that sense, central banks can’t control the supply and price of money/liquidity at the same time.  And this is the only sense that is of material consequence, particularly for the question that worries Adair, namely, the effect of low rates of borrowing on spending, borrowing and leverage.

The tax isn’t irrelevant, but it is best understood as part of fiscal policy.  It’s no more an indicator of monetary policy than if we were to hear that the central bank required bank CEOs to deliver trays of cupcakes to Mark Carney every morning.

To carry out this thought experiment, I have – without mentioning it explicitly above – had to imagine that the BoE stops paying interest on reserves.  Without reverting to the old monetary policy implementation framework, helicopter money will simply increase the quantity of reserves out there – either directly, or indirectly – on which the central bank has to pay interest, in the form of more interest bearing reserves, leading to an explosion in liquidity.  Adair explains this himself in his paper, and MPC members Carney and Vlieghe have both talked about these consequences too, the former at Treasury Committee, and the latter during a Q and A after his first public speech as MPC member.

Abandoning interest rates on reserves is not a material reason to refuse to contemplate helicopter money, in my view.  But that is probably worth a post on its own, so I will not go into it further here.



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6 Responses to You can’t have your helicopter money cake and eat high interest rates, Adair

  1. If interest is paid on reserves, excess reserves are identical to T-bills for the private sector as an investment vehicle.

    “Helicopter money” is just an attempt to bypass fears of government default, since most people realize that it is hard for a central bank to default. At the same time, a central bank is a subsidiary of the Treasury. If the subsidiary cannot default, why are people worried about a default by the parent? This is a sign that fiscal conservatives who worry about default are not entirely rational, and so we end up with irrational proposals to deal with irrational fears.

  2. JKH says:

    “And one that won’t inhibit the injection of money through the helicopter drop from affecting the interest rates on all other assets, along the spectrum of liquidity from very close substitutes to central bank money, to more distant ones.”

    The central bank absolutely controls its own short term policy rate. It’s an administered rate – not a market rate. Control of the corresponding trading range for the rate works through either a channel system or a floor system. QE works with a floor system, where the interest rate on reserves sets a floor (more or less) for the trading range.

    That policy rate structure influences the yield curve including “risk-free” term rates through expectations. The yield curve consists of market rates. There is influence but not control.

    Concerning IOR as fiscal policy: Anything to do with central bank interest rates – IOR included – is fiscal policy. Central bank profit is fiscal policy. The central bank income statement is fiscal policy. The balance sheet (showing the result of principal value exchanges) isn’t – except for the equity position.

    I wish I understood the last two paragraphs of your post, but …

    (I’ve only skimmed Adair’s paper but I’ve heard his excellent presentation to the positive money people.)

    • Tony Yates says:

      I don’t disagree with a word of this, but I maintain that every word of mine is right! Including on semantics [I wrote a whole post about this a while back …. but I think the term still has use. The point is that the ‘tax’ that takes banks off their demand curve for reserves doesn’t shield the economy from the stimulus imparted by helicopter money.

      • JKH says:


        Looks OK. That part of my comment was more a secondary observation than a point on the main substance of his paper.

        I’ve had a chance to look at the paper more closely. It looks like his point of caution about negative rates alone is that it would work in part by increased leverage in the banking system – encouraging people to borrow more, etc. So leverage gets bubbled up as a risk.

        Whereas monetary finance works through rational elimination of otherwise rationally expected Ricardian equivalence on the debt alternative to money finance. That should encourage spending from the bank money created by monetary finance, compared to the debt case.

        Presumably, the two in combination would be more powerful, including the leverage risk he cites for negative rates alone.

  3. john says:

    So drop a couple thousand into every taxpayer id. The vast majority of those people are going to either spend it right away on stuff they need or repay onerous debt they haven’t been able to earn their way out of. The rest will either blow it or save/invest it. The net result is a big increase in demand.

    So GDP rises, which presumably means business investment opportunities rise at the margin, and you’re telling me rates are going to fall? Wanna try again?


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