One way to implement helicopter money is to have the government finance a tax cut or a government spending increase, with a conventional bond issue, and have the central bank buy the bonds with newly created electronic money.
During the post-2008 recession, tax revenues fell, government spending [in the UK, at least on transfer payments] and bond issuance rose, and central banks bought government bonds with electronic money. A lot of them.
This policy was called ‘quantitative easing’, not ‘helicopter money’ because it was the first leg of a two-leg policy, where the second leg would involve reversing the bond purchase down the road after the economy had recovered. But half way through, the two policies are indistinct. ‘They’ might be doing helicopter money anyway, even though it’s called ‘quantitative easing’.
Are they doing helicopter money anyway? And if they were, what would we infer from whether we should?
There seem to be several varieties of the argument.
One is they are doing helicopter money anyway, so they should jolly well come clean about it and stop hoodwinking the people. And if they did, the policy would be more successful in boosting the economy. QE involved a smaller stimulatory bang for the buck, the buck being a risky intermingling of monetary and fiscal institutions.
Another variation on the argument, that I heard recently, was that they might be doing it anyway, and that shows that if they did do it explicitly, we would not expect any magical extra stimulus to follow. So best leave central bank policies as they are.
Yet another is: since when we do QE, we will look like we are doing helicopter money anyway, we shouldn’t do QE at all’. This argument was circulating inside central banks at high velocity as it became clear that central banks were going to run out of interest rate cuts and something else would have to be done. Evidently, it was set aside as central banks went ahead with QE regardless.
Central banks’ retort is: a helicopter money plan is clearly delineated from a QE plan by the fact that it involves only one leg, not two, of the QE policy, ie a transaction that is never reversed.
But this delineation is only as good as the ability central banks have to tie their hands in the future to reverse the bond purchases, thus finally revealing with certainty that the policy was QE and not HM. Since that might involve tying the hands of different people who succeed the current decision makers as Governors and voting members, such certainty is not possible. Knowing this, QE is unavoidably somewhat HM-like.
But by the same token, a bond purchase that was determinedly announced as HM would be unavoidably QE-like: subject to a possible reversal down the road when a more conservative central banker takes over.
Where do I come out on all this?
I think that there is some possibility of influencing the guess that people have about whether QE is reversed at down the road.
Committees don’t turn over completely each period, so quicker reversals can be executed more reliably than slower ones.
New members are likely to find the reputation for promise keeping of some value to themselves – perhaps to distinguish a new round of QE from HM, or vice versa! – so they won’t feel entirely unbound.
And the separation between the policy could be encouraged – if not entirely guaranteed – by the finance ministry, or a third party body that scrutinises the central bank [in the UK, the Treasury Committee, say]. And I say ‘not entirely guaranteed’ for the obvious reason that we can’t expect the fiscal authority to discipline itself to limit monetary financing, precisely the reason why there is often legislation that attempts to rule it out.
Since there’s hope that the two can be delineated, QE should be the first resort at the zero bound, [well, after plain bond financed fiscal policy, that is] and HM the last.
[Inspired by slide-show I saw recently that I can’t attribute as it was given under Chatham House rules].