Helicopter money is normal, or else we're doomed!

With one exception, Tony Yates strikes me as being a very sensible and very good money/macro economist. But at the mention of "helicopter money", he seems to turn into an Old Testament prophet, or maybe Private Frazer from Dad's Army, saying "We're doomed, I tell ye!" (or maybe this longer video makes my point better). (That's my payback for Tony calling us Market Monetarists a bunch of trainspotting anoraks!)

Here's Tony: "I am left being prepared to concede that helicopter drops might generate inflation, but not that they would be beneficial, since they may lead to the steady destruction of that money altogether with all the attendant costs."

If we were indeed "doomed" by helicopter money, we would be long dead. In fact, we are doomed by not doing helicopter money. Doomed to communism!

Let's do a back of the envelope calculation. Assume 5% nominal interest rate, 5% NGDP growth (3% real plus 2% inflation target), and 5% currency/NGDP ratio. Ignore the costs of paper and ink, to keep it simple. Every year the central bank prints money equal to 0.25% of NGDP, and every year the central bank's profits are 0.25% of NGDP. And every year the central bank gives those seigniorage profits to the government.

What does the government do with those seigniorage profits? It spends them, of course. By having government spending 0.25% of GDP higher than it otherwise would be, or by having taxes 0.25% of GDP lower than they would otherwise be, or transfer payments 0.25% of GDP higher than they otherwise would be. But that is helicopter money!

What is the alternative to helicopter money? What would the government do with those central bank profits if it didn't (eventually) spend them?

Well, I expect it could save them instead. Use that 0.25% of NGDP to pay down the national debt, year after year. So every year the debt/GDP ratio falls by 0.25 percentage points. (Yes, NGDP is growing at 5%, but the stock of savings from central bank profits is earning 5% interest too, so that's a wash.) Until the national debt is negative, and the government starts buying assets from the private sector.

But I haven't seen that happening. So the government must have been doing helicopter money, for years, and centuries. And if helicopter money meant we're doomed, we would be long-dead.

Where will it end, if the government eschews "helicopter money" forever? It ends in communism, of course, because the government will eventually own everything!

If the government does not do helicopter money: we're doomed, I tell ye! Doomed to communism!

(And if the central bank follows the Freidman rule, so the central bank earns no seigniorage profits, we are also doomed to communism.)

Comments

[Market Fiscalist]

"if the government eschews "helicopter money" forever? It ends in communism, of course, because the government will eventually own everything!"

If the CB targets a growth in NGDP less than or equal to the growth in RGDP (an average inflation rate of less than or equal to 0) we can avoid eventual communism as the real value of the government balance sheet will not increase over time. Is that correct ?

[Nick Rowe]

MF: I don't think that's correct. Seigniorage is still positive, and is growing with GDP.

Plus, the lower the inflation target, the lower the opportunity cost of holding 0% nominal interest currency, the larger the demand to hold that currency, and the larger the central bank's balance sheet. In the limit, as currency yields the same rate of return as all other assets, yet is more liquid that all other assets, the central bank owns everything. And since the government owns the central bank, that means communism!

[JKH]

Nick,

I've always noticed that notwithstanding your occasional displeasure with the accounting perspective, you consistently employ the usual definition of seigniorage, which is very much a de-consolidated accounting construction.

The consolidated interpretation is one of opportunity cost, right? The seigniorage exists as a reduction in interest cost.

In that view, you can end up in the same place through a different route. Unless the government in effect spends currency demanded into existence as a deficit (i.e. helicoptering) then it must create it by acquiring private sector assets.

[Nick Rowe]

JKH: There are two ways of calculating seigniorage income:

1. (M/P) times the interest rate differential between central bank assets and liabilities.

2. (dM/dt)/P

If you assume that central bank money pays no interest, you should eventually get the same answer either way, but one method uses...errr....accrual(???) accounting, and the other method uses....a different form of accounting. (You explained this to me once before, but I keep forgetting the accounting terms. The first records interest income as it is earned, and the second treats the purchase of an asset as income, if it's financed with an interest-free loan. Something like that.) I mentally switch back and forth between the two methods. In an evenly growing economy, it should make no difference which way we do the accounting.

I think I am agreeing with you.

[Nick Rowe]

JKH: Ah! But you are talking about the distinction between consolidating or not consolidating the central bank + government balance sheets. In this case, yes, it shouldn't matter. We end up with the same result either way. Either the government spends (or cut taxes) with seigniorage, or else it buys assets (either government bonds, or something else) from private agents.

[Herbert]

Citing Nick: "There are two ways of calculating seignorage income:

1. (M/P) times the interest rate differential between central bank assets and liabilities.

2. (dM/dt)/P.

In an evenly growing economy, it should make no difference which way we do the accounting."

Nick, this is the first time I believe you are outright wrong. Assume an efficient steady state, so r > g. Assume also (which is immaterial but makes the argument easier) that P is constant, hence i = r.

#1 yields seigniorage M/P times i.

#2 yields seigniorage M/P times g.

As i > g, seigiorage is LARGER in the first case.

[Market Fiscalist]

"MF: I don't think that's correct. Seigniorage is still positive, and is growing with GDP."

OK, But what about the case when the CB targets NGDPT = 0? There will be deflation to match RGDP growth - and this will be reflected in the nominal interest rate. But I'm not seeing why this will cause the currency/NGDP ratio to change (beyond what happens when the new target is first adopted). (I think I can see why this would be the case if deflation exceeded RGDP growth.

[Nick Rowe]

Herbert, and MF: I had to think about this.

Take a simple case where NGDP growth is zero, and the nominal interest rate is positive.

Suppose I start a central bank de novo. In the first year I print M dollars, and the price level is P, so that's M/P real dollars. I print nothing in subsequent years.

#2 gives a one-shot seigniorage of M/P, and nothing thereafter.

#1 gives a constant annual flow of seigniorage of (M/P)i. But the present value of that annual flow of seigniorage is (M/P)i/i = (M/P)

So we get the same answer either way. It's just that the #2 method capitalises the future flow of seigniorage from the current real dollars printed, and the #1 method only counts the interest income as it is received.

Something like that.

[Max]

Suppose the central bank were run on a break-even basis by paying interest on money, including paper money. Would the demand for money inevitably go to infinity ("communism"), or would it stabilize at some higher level?

[Herbert]

Nick, I agree with your argument that a one-shot of seigniorage (#2) and a constant annual flow of seigniorage (#1) have the same present value.

Therefore, the two specifications lead to identical conclusions in a Ricardian model, where the time profile of seigniorage payments plays no role.

But you often argue with overlapping generations models. Here, the two specifications entail different steady state capital stocks. In a sense, the one-shot seigniorage is similar to government debt. It depresses the capital stock.

[RebelEconomist]

A thought-provoking, if somewhat over-complicated, post. As a former central banker, I prefer to think of seigniorage as the interest rate (strictly "return" to allow for other types of assets such as equities) pick up between a central bank's assets and its liabilities, which proceeds whether the nominal economy grows or not.

Isn't the issue simple? The difference between normal monetary policy and a helicopter drop is that in normal monetary policy, the central bank's balance sheet is always balanced. In other words, the central bank only creates money to transfer to the government to the extent that the value of its assets has been increased over and above the value of its liabilities by interest. Given a bit of capital, this leaves the central bank in independent control of the base money stock. In a helicopter drop, however, the central bank is required to create money to transfer to the government regardless, and most likely in excess of, the value of its assets. Indeed in my view, this is the defining feature of a helicopter drop - a free transfer of central bank money to the government without any asset backing - not permanence or a change in the inflation target, such as the academics like to emphasise.

Central banks have run with negative net worth at times (eg the Czech Republic and Chile), but not in situations where they might come into conflict with their government over inflation, in which case the central bank's ability to independently control the base money stock matters. I therefore agree with Tony.