Παρασκευή, 13 Μαΐου 2016

The hurdles to ‘helicopter money’ are shrinking


11/5/2016

By: Stephanie Flanders

Monetary financing of a fiscal stimulus may yet happen in the next downturn

Next time you’re struggling to keep up with the pace of change in the world, spare a thought for the publishers of monetary policy textbooks. Deflation, the mechanics of bank runs, quantitative easing, negative policy rates — in the past decade a slew of topics have moved from the realm of academic footnotes to the centre of economic debate.

Now we can add “helicopter money” to the list — the idea, originally from Milton Friedman in 1948, that a government could always tackle a problem of weak demand by printing banknotes and scattering them from a helicopter.

It is an evocative concept, but is it even possible and could it work? The answer to both questions is yes. Central bank-financed fiscal stimulus would be the logical endpoint of the unconventional policies we have seen from central banks since 2008.

To be clear, we are not literally talking about throwing money out of aircraft. The government would announce, for example, that it had decided to give $500 to all citizens via their bank accounts.

To pay for that spending, commercial banks would be credited with an equivalent amount in new central bank reserves. At the same time, the government would credit the central bank with a perpetual non-interest bearing bond, functionally equivalent to cash. That accounting item answers one common objection to the policy — that it would leave a big hole in the central bank’s balance sheet.

All of this sounds like a free lunch, and in many ways it is. But only as long as the central bank doesn’t have to pay interest on those additional reserves. In the end, the helicopter drop must be paid for, either via additional reserve requirements for banks — to remove the need to pay interest on at least that part of reserves — or through future seigniorage revenues once inflation moves back up.

Would this accounting change do anything to stimulate the economy that bond purchases alone had not already achieved? Proponents say it would, by reassuring households and businesses that the public balance sheet was a lot healthier than they thought. A helicopter drop would also have a better chance of reaching every household, allaying worries about the distributional consequences of QE.

The catch is not technical — it is political. In most countries, central bank independence was hard won and has been in place for less than a generation. If the monetary authorities’ independence or their credibility were fatally damaged, the long run negative consequences for the economy could far outweigh the short-term stimulus afforded by a calling in the choppers.

For it to be worth the risk, a central bank would need to be able to show it could prevent additional bank reserves leading to excessive inflation as the banks put the money to work via the credit multiplier — for example, by imposing adjustable reserve asset requirements. They would also need to demonstrate the money would indeed be spent and would contribute to both short- and long-term growth.

If monetary financing is measured by the net impact on the level of government debt, then it has almost certainly already occurred in the countries that have seen significant QE. By reducing government bond yields right along the yield curve, sovereign bond purchases have directly reduced debt servicing costs, in the short run as well as long-term.

This is quite evident in eurozone countries where new government debt is being issued at an implied negative yield. That means investors — in effect — are taking a haircut on the face value of the debt, from day one. One could also argue that the further decline in bond yields in 2015 and early 2016 has quietly enabled a loosening of fiscal policy in several Eurozone countries.

For now, the taboo against more explicit central bank financing is still operating. But the barriers against monetary-driven fiscal stimulus look a lot weaker than they did even a few years ago.

If another downturn threatens while policy rates are still close to zero and balance sheets are still enlarged, it is a reasonable assumption that at least one central bank abandons the pretence and monetary financing will complete its move from the unthinkable to the merely “unconventional”.

Stephanie Flanders is the chief markets strategist for Europe, JPMorgan Asset Management

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