Helicopter Bonds as Qualitative Easing

Accounting can be fun.

Helicopter Bonds is when the government prints some bonds and drops them out of a helicopter, so whoever picks up the bonds now owns them. It's identical to a bond-financed lump-sum transfer payment. It's identical to a bond-financed lump-sum tax cut (because only net taxes=taxes-transfers matter). The government borrows money from the population by selling bonds, then gives them the money back, and lets them keep the bonds. At the end of the day the population has the same amount of money, and more government bonds.

If Ricardian Equivalence were true, Helicopter Bonds would have no effect on anything. It is exactly as if, when the government gives me a government bond worth $100, the government demands I give it my personal IOU (my personal bond) for $100 worth of future taxes. It is exactly as if the government and I simply swapped a government bond for my personal bond. And in the world of Ricardian Equivalence, where it doesn't matter whose name is on the bond, the net effect is zero.

Now let's consider a simple case where Ricardian Equivalence is false. Half the population is borrowing-constrained. They can't borrow. That means they want to sell their personal bonds (IOUs) but nobody will buy them. So Helicopter Bonds causes half the population to sell their government bonds to the other half, so they can spend the proceeds. Again, it is exactly as if the government and I swapped a government bond for my personal bond. But in this case, where Ricardian Equivalence is false, it does matter whose name is on the bond. Because only the government will buy a bond with my name on it, if I am one of the borrowing-constrained half of the population.

Quantitative Easing is the silly new name for Open Market Operations. It's when the central bank prints money to buy a bond. It expands both sides of the central bank's balance sheet. Qualitative Easing is when the central bank changes the composition of the asset side of its balance sheet, leaving the liability side unchanged. It sells government bonds, and buys some riskier or less liquid asset.

If we consolidate the balance sheets of the central bank and the government that owns that central bank, that means we can see Helicopter Bonds as a form of Qualitative Easing. The government/central bank swaps safe and liquid government bonds for less safe and less liquid private bonds. In my example above, where half the population is borrowing-constrained and unable to sell their personal bonds at all, Helicopter Bonds is just an extreme case of Qualitative Easing where their personal bonds are extremely unsafe or illiquid. In a less extreme case, the borrowing-constrained can borrow, but only from loan sharks.

Comments

[Market Fiscalist]

If you think about it in terms of loans rather than bonds then "helicopter bond policy" is also the functional equivalent of the govt borrowing money off half the population and lending to the other half at a rate of interest lower than they would get if they instead borrowed from loan sharks.

Qualitative Easing would be the equivalent of selling good loans it had on it books, and using the proceeds to buy riskier loans. If it chooses to issue loans to the same half of the population as in the "helicopter bonds" case we end up with the same outcome.

Does this mean that both monetary policy (at least when it relies on QE) and fiscal policy rely on the same strategy of lending money to feckless people ?

[Market Fiscalist]

And even OMO is the functional equivalent of the govt/CB lending money to people at a rate below what they could borrow without the OMO.

[Nick Rowe]

MF: "Does this mean that both monetary policy (at least when it relies on QE) and fiscal policy rely on the same strategy of lending money to feckless people ?"

If "QE" there means "QuaLitative Easing", then yes. But in an Overlapping Generation model fiscal policy works by transferring from future generations to the current generation.

But OMO *creates* new money, which is different.

[dlr]

If Ricardian Equivalence were true, Helicopter Bonds would have no effect on anything.

I don't think this is strictly true, the government still has a long term budget constraint. If the UST helicoptered out $900 trillion bonds, expected inflation would skyrocket even with Ricardian Equivalence. Unless, of course, people believed the government would default before allowing inflation to inch above its target. And this doesn't only apply to helicopter bonds crazy enough to guarantee government insolvency. In theory, every new liability relative to an exogenous maximum possible PV of future surpluses should increase the riskiness of government bonds, which will in turn affect the equilibrium price path unless (1) The CB wants to offset the effect (2) The CB can offset the effect (enough helicopter bonds leaves the CB powerless). But if Helicopter Bonds were done as a part of a monetary communications strategy, kind of a working assumption here, CB offset may not be an issue.

[Too Much Fed]

"Quantitative Easing is the silly new name for Open Market Operations. It's when the central bank prints money to buy a bond. It expands both sides of the central bank's balance sheet."

I hope JKH or Mike Sproul can weigh in here.

It seems to me Quantitative Easing means the central bank reserves are not allowed to reflux back to the central bank.

If Quantitative Easing is not in effect, then the central bank reserves can reflux back to the central bank.

If Quantitative Easing is not in effect, then the central bank won't force/supply more central bank reserves onto the commercial banks than what is demanded.

If Quantitative Easing is not in effect, then an "OMO" can be immediately reversed.

The way the system works now currency can always reflux back to the central bank. That means the central bank won't force/supply more currency onto the system than what is demanded.

[Nick Rowe]

dlr: " If the UST helicoptered out $900 trillion bonds, expected inflation would skyrocket even with Ricardian Equivalence."

No. That's wrong by definition of "Ricardian Equivalence".

Ricardian Equivalence says: bond-financed increase in G is equivalent to a tax-financed increase in G.

Subtract the second policy from the first, and you get no change in G, and a bond-financed cut in taxes. Which is equivalent to a bond-financed increase in transfers, which is equivalent to helicopter bonds. But if the first and second policies are equal, if you subtract the second from the first, you must get zero.

[Nick Rowe]

And what the hell is "UST"? This is a Canadian blog! ;-)

[Nick Rowe]

dlr: here's the intuition. The government gives me a trillion dollar bond that pays 5% interest, but tells me that I owe it an extra trillion dollars plus 5% interest in taxes next year, or else. So I keep the bond, and next year I give it back to them.

[dlr]

dlr: here's the intuition. The government gives me a trillion dollar bond that pays 5% interest, but tells me that I owe it an extra trillion dollars plus 5% interest in taxes next year, or else. So I keep the bond, and next year I give it back to them.

Oh. I always thought of it as a "real" equivalence. Let's assume away all the conventional Ricardian exceptions -- consumers are forward looking, homogenous and not borrowing constrained. Now the government helicopters out 900 trillion in 5% bonds, woohoo. I thought the "equivalence" was that people expect they will have to pay back this $900t (plus interest) in real terms. so their consumption doesn't change and equilibrium real interest rates don't change. What is the mechanism of enforcing a nominal equilibria such that the 900t holds its value in this case? Does anyone actually believe in this form of RE? Even the MMTers would blush, I think.

[Nick Rowe]

dlr: you lost me there. There's neither any real change nor any nominal change. (It's hard to see how there could be one without the other, if we are holding the stock of money constant.)

The intuition is simply "the national debt is irrelevant because we owe it to ourselves".

(MMT are somewhat inconsistent on this question, because they believe *both* that "the national debt is not a burden on future generations because we owe it to ourselves" AND "a bond-financed tax cut will encourage spending because it makes us richer".)

[Nick Rowe]

Nobody believes Ricardian Equivalence. Opinions differ on the extent to which it is true/false. I think it's probably about half and half, though it depends on the case.

[dlr]

dlr: you lost me there. There's neither any real change nor any nominal change. (It's hard to see how there could be one without the other, if we are holding the stock of money constant.)

I can see from your answers that I am wrong on the definition and you can't violate the government budget constraint and still be "Ricardian." I am just saying that normally people think of Ricardian violations on the spending side, things like heterogeneity and borrowing constrained consumers, as in the example in this post. Or maybe some safe asset shortage that is cured. But there is another way to create a Ricardian violation, right? Just a typical expectations-based Sargent and Wallace violation where people expect monetization of debt, the heart of FTPL. I am just pointing out that this is much less debatable violation. People differ a lot on the extent to which borrowing constraints matter, but I think most people agree that fiat issuers can embed the risk of possible monetization in the price level with enough helicopter bonds, even if none of the usual violations exist. Much of South America has made a hobby of it.

And this kind of Helicopter Bond Ricardian violation -- expected monetization -- shouldn't be thought of as Qualitative Easing.

[Nick Rowe]

dlr: Ah! OK. Yes, expected future debt monetisation would be one reason to violate Ricardian Equivalence. And yes, that's not qualitative easing, as we normally think of it.

[Tel]

If Ricardian Equivalence were true, Helicopter Bonds would have no effect on anything.

Only in the unlikely situation that no redistribution is happening.

[Tel]

The intuition is simply "the national debt is irrelevant because we owe it to ourselves".

Based on the strange belief that economies have no structure, and that the pronoun "we" is meaningful in the context of private debt.

If it's as simple as "we owe it to ourselves" then just write off all debts, that would fix everything, right? Better yet, abandon enforcement of all future debt contracts forever and we have the best economy evahhh! But you can probably identify why that's not going to work.

[Henry]

Nick said:

"Nobody believes Ricardian Equivalence. Opinions differ on the extent to which it is true/false. I think it's probably about half and half, though it depends on the case."

Ricardian equivalence is in the provenance of the New Classicals. Keynes seems to have obliquely considered it himself:

Pages 94 and 95 GT:

"Changes in fiscal policy. In so far as the inducement to the individual to save depends on the future return which he expects, it clearly depends not only on the rate of interest but on the fiscal policy of the government. Income taxes, especially when they discriminate against 'unearned' income, taxes on capital-profits, death-duties and the like are as relevant as the rate of interest; whilst the range of possible changes in fiscal policy may be greater, in expectation at least, than for the rate of interest itself. If fiscal policy is used as a deliberate instrument for the more equal distribution of incomes, its effect in increasing the propensity to consume is, of course, all the greater[2].
We must also take account of the effect on the aggregate propensity to consume of government sinking funds for the discharge of debt paid for out of ordinary taxation. For these represent a species of corporate saving, so that a policy of substantial sinking funds must be regarded in given circumstances as reducing the propensity to consume. It is for this reason that a change-over from a policy of government borrowing to the opposite policy of providing sinking funds (or vice versa) is capable of causing a severe contraction (or marked expansion) of effective demand."

Page 120 of GT:

"With the confused psychology which often prevails, the government programme may, through its effect on 'confidence', increase liquidity-preference or diminish the marginal efficiency of capital, which, again, may retard other investment unless measures are taken to offset it."

[David]

I smell too much moralizing here and too little empirical analysis.

[Nick Rowe]

David: that smells like projection on your part. Read the first line. It's *accounting*; there's zero empirical analysis.

Henry: Ricardian Equivalence came back into consideration in Macro in Barro's 1973 article "Are Bonds Net Wealth?". Just earlier, in 1971, Barro and Grossman had published their very Keynesian model. The main attack on Ricardian Equivalence came from Buchanan, who was many things, but not Keynesian. And many Keynesians have been rather inconsistent on the question, arguing both that Ricardian Equivalence is false, and that there is no debt burden because we owe it to ourselves. It's a funny old world.

[JF]

I assume the bonds are given only to thise of low to no net worth. But of thise who have the correct net worth, what about their incomes, only those of high income, only those low income, who gets these newly "printed" special bonds?

If these bond get given out only thriugh the financial system the concentration would align them predominantly to those of high net worth, likely with high income too.

Alas. So now we have another tool, qualitative easing, with what purpose?

[Jan Musschoot]

Hi Nick, I have written a complete analysis of this post at http://blog.janmusschoot.be/2016/04/08/helicopter-bonds-a-reply-to-nick-rowe/

There are some things not clear in your text, hopefully my post and drawings will help to straighten things out!

[Left Coast Bernard]

Dr. Rowe,
What is the "government budget constraint" on a government that issues its own currency and borrows in its own currency? I can see that Florida, where I live, faces a government budget constraint, but what is the budget constraint on Uncle Sam?
Indeed, what is the expression Canadians use to refer to the Canadian government that is analogous to Uncle Sam?
Why do you refer to the central bank "printing money"? The government creates currency by changing the numerical value of some variables in its computers, as I understand it. Printed currency is a small fraction of the money in circulation. Why not refer to creating currency or money? Referring to "printing money" comes with bad connotations for many people.
Left Coast Bernard

[Frank Restly]

Bernard,

The government budget constraint comes from debt serviced by tax revenue. Even when bonds are owned by the central bank, that does not relieve the federal legislature from making payments on those bonds. In the U. S., the directive for the legislature to make bond payments comes from the Constitution and the judicial branch of government.

Suppose for instance that current year interest payments on government debt exceeded current year tax revenue. Even if the central bank held all of the public debt, that would not relieve the legislature from those payments. The central bank could choose to remit interest payments back to the Treasury, but that would be a choice for the central bank to make - not a legal imposition placed upon the central bank.

[jonathan]

Nice. So we can think of debt-financed fiscal policy as being a sort of monetary policy. Instead of swapping money for bonds (normal monetary policy), the government is swapping bonds for future tax liabilities. And bonds are much more liquid than future tax liabilities, just like money is more liquid than bonds (in normal times).

[Jussi]

Jonathan + 1.

The post seems to imply that OMOs, as/if they affects mostly non-borrowing-constrained side of the economy, might be ineffective at the effective lower bound. And fiscal, maybe in the form of a heli-drop, is needed (more effective)?

[Left Coast Bernard]

Mr. Restly,
Thank you for your reply to my questions.
I have long wondered, in the case of the US, why the Fed doesn't just stamp Paid In Full in big red letters on any bond it buys, stack them up, and truck them over to the Treasury Department to be shredded.
As Dr. Rowe tells us in his last paragraph, we may imagine a consolidated balance sheet of the government and its wholly owned central bank. When the central bank purchases a Treasury bond, the public person who loaned the Treasury money has now been paid back. It's only a matter of internal consolidated accounts that requires the Treasury to pay interest on the bonds once the central bank has them, and that leads the central bank to return those interest payments to the Treasury as bank profits at the end of the year. During this time, the internal accounts show the same bond as a debt of the Treasury and an asset of the central bank. But both are accounts of the consolidated government.
I would like to know the Canadian metaphoric analog of Uncle Sam, if Dr. Rowe or a reader could help me.
Left Coast Bernard

[Nick Rowe]

JF: "I assume the bonds are given only to thise of low to no net worth."

No. If we take the helicopter metaphor literally, the bonds are given to people at random. If we take it as a metaphor, the bonds are metaphorically given to whoever the government decides should get a bond-financed transfer payment or tax cut.

Jan: thanks. I had a quick skim. I will give a comment a little later.

LCB: that's an old canard. Here is the standard answer: the government (or rather the central bank) can print as much money as it wants, and when it prints money and buys government bonds, any money the government pays the central bank as owner of those bonds gets handed right back to the government, which owns the central bank. So what you propose ("paid in full") is already happening. What this means is that the government does not face a *nominal* (measured in dollars) budget constraint, but it does face a *real* (inflation-adjusted) budget constraint, because if it prints too much money it causes inflation to rise, which means those dollars it prints are worth less.

There is no obvious Canadian equivalent to "Uncle Sam". "Her Majesty the Queen of Canada" doesn't quite mean the same thing.

jonathan: Thanks. But I would draw a line between money and all other assets. A difference in degree of liquidity becomes a difference in kind, when we are talking about the *most* liquid asset. The liquidity race is a bit "winner-takes-all", in that only the most liquid asset becomes medium of exchange.

[JKH]

Nick,

Interesting idea, but I don’t exactly agree with your analysis.

Ricardian equivalence holds in all cases where you represent a projected tax liability (due to government borrowing) in the form of a bond issued by the private sector – which you have done in all cases. The fact that borrowing constrained private sector issuers may sell their government bonds to raise cash doesn’t change that – their own projected tax liabilities still exist. So there’s no differentiation between Ricardian and non-Ricardian in what you’ve described. It’s all Ricardian. It's just that the quality distribution of the private sector credits may result in different portfolio management behaviors in what they do with their helicopter bonds.

And this type of analysis is not unique to “helicopter bonds”. It applies to all bonds issued by the government. If Ricardian, then the consolidated government sector holds implied private sector bonds, in effect, in all cases, consistent with this type of analysis.

I think the analysis indicates rather that Ricardian equivalence is itself equivalent to qualitative easing for the consolidated government sector. It’s a much more general statement than the particular case of “helicopter bonds”. The implied private sector bonds can be associated with any source of the (effective) deficit that gives rise to the Ricardian question – not just transfer payments or tax reductions implied by “helicopter bonds” (or for that matter by “helicopter money”).

From an “accounting fun” standpoint, it’s one way of making the consolidated government sector balance sheet balance.

And it could also apply to the mismatched central bank balance sheet that is typically featured in the proposals of the pushers of “helicopter money”. In that case, the CB holds implied private sector bonds (projected taxes due) instead of the government bonds that might (in some cases) have been provided by a recapitalization of the CB balance sheet in the event of helicopter money drops. Those implied bonds can be viewed as a commitment by the government to recapitalize the CB with actual government bonds in the future if necessary.

So much fun.

[Too Much Fed]

https://www.federalreserve.gov/boarddocs/Speeches/2002/20021121/default.htm

"Fiscal Policy
Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.18

Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets."

1st paragraph. Does bernanke mean tax cut to new gov't bond to fed buys existing gov't bond with new "money"?

[Nick Rowe]

JKH: "Ricardian equivalence holds in all cases where you represent a projected tax liability (due to government borrowing) in the form of a bond issued by the private sector – which you have done in all cases."

I disagree. But this is probably just a semantic disagreement between us.

Ricardian Equivalence, understood literally, says that the effects of a bond-financed increase in G are *exactly* the same as a tax-financed increase in G (for the same G, of course). Which is the same as saying a bond-financed tax cut (transfer increase) has zero effects. And Ricardian Equivalence may be false even if people fully understand/accept their future tax liabilities inherent in the bond-finance. (Ignoring the future tax liabilities is only one reason why Ricardian Equivalence may fail.)

"From an “accounting fun” standpoint, it’s one way of making the consolidated government sector balance sheet balance."

Hmmm. Yes.

[Too Much Fed]

JKH, how did OMO's work in the USA pre-2008? Thanks!

[JKH]

TMF

CB buys treasury bonds to accommodate growth in currency and required reserves
CB does repos to manage the level of excess reserves, in order to control the funds rate

[JKH]

"Now let's consider a simple case where Ricardian Equivalence is false. Half the population is borrowing-constrained. They can't borrow. That means they want to sell their personal bonds (IOUs) but nobody will buy them. So Helicopter Bonds causes half the population to sell their government bonds to the other half, so they can spend the proceeds. Again, it is exactly as if the government and I swapped a government bond for my personal bond. But in this case, where Ricardian Equivalence is false, it does matter whose name is on the bond. Because only the government will buy a bond with my name on it, if I am one of the borrowing-constrained half of the population."

Nick,

I'm trying to understand what this paragraph has to do with Ricardian equivalence - true or false

Can you elaborate?

[JKH]

TMF

should have added:

- growth in currency and required reserves is a drain on excess reserves, other things equal
- which is unsustainable for funds rate management
- so the drain has to be offset by a replacement injection of reserves by buying treasury bonds
- the resulting level of excess reserves, which is relatively steady on a trend basis, still needs to be managed/fine tuned due to ongoing daily volatility in the demand for excess reserves by banks

all pre-2008

[Tom Warner]

You're doing a real service here by forcing people to think through how all these mechanisms work. I agree with everything except your last two paragraphs.

But first a bit about "helicopter bonds." The crucial point here is that it is practically the same as standard debt-financed fiscal expansion. In one, a government prints bonds, swaps them for cash in a free market, and spends cash. In the other, a government prints bonds and "spends" those bonds, by distributing them directly in lieu of money, and then some (most) bond recipients swap bonds for cash in a free market. "Helicopter bonds" only differ by pushing the job of selling bonds from government to private recipients. In both scenarios, the real essence of what is going in is the government is printing and spending bonds.

Now consider what happens instead with standard QE in which the CB buys sovereign bonds at a flow rate less than the fiscal deficit. The government prints bonds and swaps them for cash with brokers, the brokers in turn swap bonds for cash with the central bank, and the government spends cash. If government and central bank are treated as arms of a single group called public authorities, their consolidated balance sheet will show public authorities are printing and spending cash. In other words, standard QE is monetary financing of current public expenditure.

So long as you treat the stock of sovereign bonds as one big fungible lot, standard QE does not actually convert the sovereign debt stock into cash. It can do so only if QE exceeds the fiscal deficit, which so far as I know has happened only in Japan.

I think the most important point here is that bond printing is not really that different from monetary financing. Bonds and cash have different terms, and different interest rate, and only one is legal tender. And those differences matter, to a degree depending on circumstances, to interest rate markets and to the real economy through interest rate channels. But both are ways that public authorities finance public expenditure by issuing public liabilities. Bond-financed fiscal expansion is inflationary for mostly the same reasons that monetary-financed fiscal expansion is inflationary.

As to the last two graphs, I don't think this sentence makes sense: "Quantitative Easing is the silly new name for Open Market Operations." OMO is a mechanism, used in QE and in interest-rate targeting. QE is not interest-rate targeting. QE is targeting a balance sheet size or declaring a certain amount by which the balance sheet will be increased. In other words, QE involves CB purchases of sovereign bonds, but not all CB purchases of sovereign bonds are QE.

Also "helicopter bonds" are not a good parallel to CB qualitative easing, because helicopter bonds increase the stock of public liabilities, not only the composition. If a government wanted to "quantitatively ease" with its debt operations, it could issue short-term debt and buy back long-term debt.

[Nick Rowe]

JKH: Ricardian Equivalence says that people will want to save the whole amount of any bond-financed transfer payment. So it will not increase consumption demand, nor interest rates, nor anything.

But if half the people want to borrow and consume, but they can't because they can't get a loan, that half of the population will want to consume their bond-financed transfer payment. Because the government has given them a loan against future taxes that nobody else would. So consumption and/or interest rates increase, so Ricardian Equivalence (which says nothing happens) is false.

Tom: Thanks. (And I'm forcing *myself* to think through those mechanisms too!)

""Helicopter bonds" only differ by pushing the job of selling bonds from government to private recipients."

Yep. Good way of thinking about it.

"QE is targeting a balance sheet size or declaring a certain amount by which the balance sheet will be increased."

Hmm. I see your perspective. Same mechanism as OMO, but a different target.

"Also "helicopter bonds" are not a good parallel to CB qualitative easing, because helicopter bonds increase the stock of public liabilities, not only the composition."

That depends whether you consider future taxes to be a government financial asset. It's not listed "on the books" (it's an "off-balance sheet asset"), but if you ignore it most governments are insolvent. And it depends on whether you count the bonds held by the central bank as a government liability, which we shouldn't, if the government owns the central bank. Only bonds in public hands are a liability. Is central bank money a government liability? Well, it's a weird sort of liability, that pays 0% interest, with no promise to redeem.

[Jacques René Giguère]

"That depends whether you consider future taxes to be a government financial asset. It's not listed "on the books" (it's an "off-balance sheet asset"), but if you ignore it most governments are insolvent."
So would private businesses. Bonds are not secured by assets (worthless if the business goes bust) but by shared hopes of future revenues. And nobody even think about thinking whether Ricardian equivalence applies or not.
Humble IO guy hopes he is not too OT...

[Nick Rowe]

Jacques Rene: On Topic.

"And nobody even think about thinking whether Ricardian equivalence applies or not."

Well, lots of finance people thing about the Modigliani Miller Theorem, which is sort of the private sector equivalent to Ricardian Equivalence.

[JKH]

Thanks Nick.

I find translating RE occasionally confusing.

Would you first agree that bond financing as an alternative to tax financing results in differential/additional saving by the private sector in aggregate as a matter of tautology, other things equal?

For example, the case of a bond recipient selling his bond and then spending doesn’t undo the aggregate private sector saving associated with the bonds when they were issued (instead of tax financing). Yet additional spending has taken place.

It seems to me that statements of Ricardian equivalence usually seem to refer to money being saved *instead* of being spent, when in fact both things can happen at the aggregate level.

Your way of specifying seems clearer, although I don’t recall seeing it put that way very often.

Even with your example, maybe you have to specify a net effect – i.e. that economic activity increases on a net basis - i.e. that the buyers of the government bonds from those who have sold them haven’t forgone an equivalent amount of spending in order to buy an increased share of bonds, although that seems unlikely.

[Jacques René Giguère]

Nick: sort of. But haven't seem so much agonising as to make such musings basic to deadly debates...

[Too Much Fed]

JKH at 8:20 and 8:30, sounds good.

Let's assume the fed does an OMO with a private entity (not a commercial bank). This leads to the creation of central bank reserves and an equal amount of demand deposits. The commercial bank who received the central bank reserves has too many. It goes back to the fed and wants to exchange the central bank reserves for bonds.

QE means no exchange allowed (no reflux). Central bank balance sheet stays the same.

No QE means the exchange is allowed (reflux occurs). Central bank balance sheet is reduced.

Is that right?

[Tom Warner]

Nick: I think we need torigorously keep straight whether we're talking about the CB balance sheet, the government balance sheet, or the consolidated public authorities' balance sheet. Otherwise it's hard to tell whether we're agreeing or disagreeing.

On the CB balance sheet:
- Sovereign debt purchases increase the stock of liabilities and assets.
- Twist (selling short bonds to buy long bonds) changes the composition of assets.
- Currency is a liability similar to an eternal bond that never has to be redeemed.

On the government balance sheet:
- Net bond issuance increases the stock of liabilities.
- Selling short bonds to retire long bonds changes the composition of liabilities.
- Currency held by the public sector is an asset.

On the consolidated public authorities' balance sheet:
- Net government bond issuance increases the stock of liabilities.
- CB purchases of sovereign bonds change the composition of liabilities.
- Currency held by the public sector nets off against CB liabilities.
- Currency held by the private sector is a liability, which must be redeemed whenever tendered for any debt public.

So your helicopter bonds increase the stock of liabilities regardless of whether you mean the government alone or the consolidated government+CB, and regardless of whether you count future taxes as assets.

But by the way I do not count future taxes as assets, and I think to do so would be the same as assuming full Ricardian equivalence.

I would say QE is one type of policy, interest-rate targeting is another type of policy, and OMO is a mechanism used in both.

And again I think it can't be stressed too much that with all of these the power is relative to the delta of the flow. Everyone seems to understand that fiscal consolidation, ie reducing the flow of net sovereign bond issuance, is disinflationary. But somehow switching from bond financing of deficit spending to monetary financing of deficit spending without increasing the rate of deficit spending came to be seen as inflationary, when that just does not compute.

By the way, your extreme variety of helicopter money, in which the CB directly distributes currency to the private sector without purchasing any assets, would be similar to net bond issuance. It would be an increase in the stock of liabilities, for the CB alone and for the consolidated government+CB, without any corresponding increase in assets. But again, ain't gonna happen.

[Tom Warner]

And just for clarification, by "extreme" I mean politically. Economically your helicopter money idea isn't actually much different from bond-financed government spending.

A close parallel is political attitudes to central bank lending to government, central bank bond purchases from government and central bank bond purchases from brokers who buy from government. In most developed countries the first is illegal and the second is shunned, but for traditional and psychological reasons, there's no material difference for the economy.

[Nick Rowe]

Tom: "But by the way I do not count future taxes as assets, and I think to do so would be the same as assuming full Ricardian equivalence."

I disagree. There are 1,001 ways in which Ricardian Equivalence can be false, even if we count future taxes as assets. I described one way in this post, where some people are borrowing-constrained). A second way is if the future taxes will be paid by future generations who are not alive yet (and there are no offsetting bequests).

"A close parallel is political attitudes to central bank lending to government, central bank bond purchases from government and central bank bond purchases from brokers who buy from government. In most developed countries the first is illegal and the second is shunned, but for traditional and psychological reasons, there's no material difference for the economy."

That is something I have never understood. I mean the politics of it.

[Tom Warner]

Nick: re the future taxes as assets issue, I accept your objection. My point is simply that if we assume that for any net bond issuance there is necessarily an equal increase in future-tax-collection assets, we have in a sense assumed a kind of Ricardian equivalence. But maybe not full equivalence in the private sector behavior sense.

Re the politics of CB lending to government, it stems from the gold standard. I'll comment on your new post.