Helicopter Money is Permanent

The shocks in a random walk process are permanent. That does not mean it is impossible for a positive shock to be followed by a negative shock. It does mean it is equally likely that a positive shock will be followed by a positive shock as by a negative shock. That's what I mean by "permanent".

Consider two policies:

A. I print $100 and give you $100. Period.

B. I print $100, and give you $100, and at the same time tell you (lead you to expect) that I will take $100 away from you next year, and burn it.

A is an outright gift of newly-printed money. It is helicopter money.

B is not a gift. B is an interest-free loan. The fact that you do not give me an IOU is irrelevant. The fact that I do not buy your IOU is irrelevant. If I know where to find you, and have no problems remembering that I lent you $100, and have no problems forcing you to pay me $100, I do not need little bits of paper with "IOU" written on them to help jog my memory and help me get the $100 back through the courts. But it is exactly as if I printed $100 and bought your one-year IOU for $100 with it. Or bought an IOU from you that someone else had signed. And bonds are IOUs.

B is an Open Market Operation, in which I print $100, buy $100 worth of bonds from you, and reverse that operation one year later. B is not Helicopter Money.

If the central bank had a Price Level Path target, or an NGDP level path target, then helicopter money is equivalent to raising that Price Level path target, or NGDP level path target. Because the stock of money will be permanently higher than it otherwise would be, and so the price level or NGDP level will be permanently higher than it otherwise would be. Or, as I argued in my old post, raising the Price level or NGDP level path target converts some existing money into helicopter money. (As Brad deLong put it) it's helicopter money without the helicopters.

I think I'm disagreeing with Simon Wren-Lewis and Eric Lonergan. (Or maybe I'm misunderstanding them, because my brain is tired.)

Comments

[Lord]

Since you can't really separate stock from flow (velocity), more stock with less flow or less stock with more flow are equivalent, and increasing stock when flow is low is followed by decreasing it when flow is high, the inverse of A being taxes (recapitalization).

[jonathan]

Helicopter money = fiscal policy (of the T kind, not the G kind). Your case B is fiscal policy with expected higher future taxes, and then you assume that Ricardian equivalence holds.

If you think that bonds = money at the margin in a liquidity trap, and the problem is a shortage of safe liquid assets (money + bonds), then fiscal policy would be effective. Ricardian equivalence fails because government bonds provide liquidity/safety services that are scarce in the economy, and thus are priced at a premium over their expected return. In these circumstances, a helicopter drop is really no different than a temporary monetary expansion during a recession away from the ZLB, which is effective.

[Nick Edmonds]

In my view, this is an important question which does not get enough attention.

I know what it means for a change to be permanent within the context of a model. But what does it mean in reality? (And it's a little misleading to refer to the one year timeframe in B. These are expectations about the distant - even infinite - future, not the short term.)

To what extent can the authorities dictate those kind of expectations? Is it not more likely that the monetary authority in 500 years time will act as they see fit for the then state of the economy, rather than being bound by the forward guidance pronouncements of their ancient ancestors?

The only way we might claim some permanence for today's change is if it has sufficient current impact that tomorrow's authorities will determine it is optimal to preserve it.

[David Comerford]

http://dcomerf.blogspot.ch/2016/03/helicopter-money-and-fee-dividend.html

[Nick Rowe]

jonathan: I don't *think* I am assuming Ricardian Equivalence, am I?

In order to consider Ricardian Equivalence, I would have to consider two new policies:

C. I give you my IOU for $100. Period. (That only works if r < g)

D. I give you my IOU for $100, but announce that you, (or the next generation) must give it back (plus interest) next year. Which is like swapping my IOU for your IOU, which might have effects if you are borrowing-constrained.

[dlr]

jonathan: I don't *think* I am assuming Ricardian Equivalence, am I?

A=C and B=D only if there is no current or expected future convenience yield on money. Printing the money and (A) keeping it outstanding or (B) redeeming it, is equivalent to handing out bonds and then either violating the budget constraint or increasing taxes later. If there is an expected convenience yield, though, you are lowering the present value of future convenience yields embedded in the price level via A, but not B, irrespective of Ricardian Equivalence, and the fiscal policy analogy isn't useful. Helicopter B can work even with no current convenience yield and no "safe asset shortage" or other Ricardian violation as long as there is an expected future convenience yield on base money.

It's true that both can also be thought of as fiscal policy on the margin, as any increase in government liabilities with an expected convenience yield is technically both monetary policy and fiscal policy, but the "fiscal policy" part is going to be a sideshow if the point is to only helicopter enough money to convince the world that the future monetary base will be less scarce than the counterfactual.

[Nick Rowe]

dlr: "A=C and B=D only if there is no current or expected future convenience yield on money."

That seems right to me. If there is a convenience yield on money (relative to bonds), then it makes a difference whether the helicopter drops money or bonds.

[Biagio Bossone]

Prof. Rowe,

How relevant is to your argument the permanence of the money stock? Assume that at some future point in time the central bank decided to withdraw the money injected via HM, typically by undertaking open market operations (OMOs). The latter, I would guess, would not do much to undo the effect of HM on NGDP. Under OMOs, the swap of money for bonds would only change the composition of private-sector wealth, not its level (which is now higher, after the HM injection). Yes, there might be an interest rate effect, but would this be such as to neutralize the effect of HM on demand? In fact, a much larger volume of money might need to be withdrawn than was injected via HM to have a neutralization effect. It would seem then that what really matters is not the permanence of the additional money stock but rather the permanently higher level of private sector net nominal wealth that HM makes possible, irrespective of whether the stock of money does or does not change in the future. Ceteris paribus (that is, for a given level of public spending) only taxation could actually undo the effect of HM on NGDP. Taxation in this case would act as a kind of "reverse HM" operation. Isn't that so?

[Haruhiko K]

Hi Nick, this is from your 2014 post:

"What makes helicopter money truly helicopter money -- a permanent increase in the money supply that does not imply increased tax liabilities or future government spending cuts -- is the announced increase in the price level target or NGDP level path target that accompanies the helicopter."

But what if we start is a situation where the expected path of NGDP or CPI is well below the central banks' announced target? What if, for example, a country had a relatively new 2% inflation target that it instituted after a long period of deflation and market pricing of 5y5y inflation was 0%.
Could helicopter money be used to buy central bank credibility in that case? SHOULD it be used in that case? And if rising inflation expectations is the conversion of some money into helicopter money, is falling inflation expectations the conversion of helicopter money into non-helicopter money?

[Nick Rowe]

Biagio: Open Market Operations will also affect NGDP, though the magnitude of the effect will depend on how long it is expected to last and on the nominal interest rates.

Haruhiko: Good question. I've been asking myself that same question. I think it depends on what people *think* is the actual target, and whether that changes when the central bank does its operation. Do people think the CB will withdraw the extra money if the price level started to rise? If so, it's perceived temporary.

[Mike Sproul]

As Ricardo said, it's irrelevant that the $100 is burned next year. New money will be continually issued, retired, and issued again, so there's a permanent float of many hundreds of dollars that never goes away. So non-helicopter money becomes helicopter money. Is that inflationary in your view?

[Max]

Routine central bank dividends are "helicopter money" in the sense that the CB pays out money and gets nothing in return. The government doesn't get correspondingly richer since it owns the CB, but the budget deficit is reduced by the CB dividends. This is reasonable accounting if the dividends are tied to the CB's profit.

If the government tried to mask a deficit by forcing the CB to pay an arbitrary special dividend (with a side promise to repay), I don't think people would be fooled. Simon thinks they would be.

[Biagio Bossone]

Nick:

"Open Market Operations will also affect NGDP, though the magnitude of the effect will depend on how long it is expected to last and on the nominal interest rates."

Correct. But here we would need to consider an one-off OMO program of the same size of the injected HM. In other words: would the replacement of $100 HM with $100 bonds (through OMOs) undo the initial impact of HM on NGDP via the interest rate effect? If not, what matters for the success of HM is not really the permanence of the additional money stock but rather the addition to the private sector net (nominal) wealth that HM makes possible. Granted, though, that if kept in money form, HM would have the stronger impact possible. The question above relates to the other one whether a $100 QE (which is a type of OMO) is as effective as $100 HM. I would say no, since QE has a more limited wealth effect. Thanks very much for your reply

[Oliver]

I think it is this part:

The fact that you do not give me an IOU is irrelevant...Or bought an IOU from you that someone else had signed...

that Lonergan (and I) would disagree with.

You're pulling an MMT 'it all cancels out' trick. If I own an IBM bond (or Apple stock, I guess), that is part of my savings. I feel wealthier because of it, unlike IBM or Apple, who don't feel 'unwealthier' because of it. They wouldn't exist without me.

Whether we feel wealthier in aggregate if individuals all borrow from each other is a more tricky question, I guess. Is that a network effect?

In any case, I think it is legitimate to at least disaggregate firms and individuals as well as gvt. / CB and individuals.

This is a separate issue from whether changes are deemed permanent or temporary by recipients or whether the satisfaction of demand for liquidity while leaving wealth unchanged has an effect on GDP.

The question whether individuals experience a change in wealth at all would seem like the first order effect to focus on.

[Jussi]

OMO swaps money to those who own bonds. The prices affected are mostly bonds, stocks, art, luxury, jets, etc. And obviously because of the higher asset prices the liquidity premiums are lowered and the extra money is absorbed (German 10 year yields currently 0,1 %). Currently is seems that OMOs do not have much of traction left - no more hot potatos through the bond owners.

HM swaps it more equally, thus wider CPI is affected and real consumption is boosted. This is because those who are less likely owning bonds are more likely have higher need for the liquidity.

I found it interesting that academics try to argue that extra money for the masses wouldn't mean higher consumption down the road, in practice it will.

[Nick Rowe]

Biagio: yes, they will likely have different "bangs per buck". But that isn't a good measure of "effectiveness", if we can simply print more bucks.

Oliver and Jussi: OK, let's put it like this. There are lots of different variants of both A and B, depending on who exactly gets the extra dollars. Is it people who are liquidity-constrained or not? But we can set those aside if we want to consider the difference between A and B. Because a bond-financed transfer payment to the liquidity-constrained could also matter for the same reasons.

[Nick Rowe]

Or, put it this way: when the central bank buys "bonds" (which is just a fancy name for IOUs), it may matter *whose* IOUs it buys.

Mike: you lost me there I'm afraid.

Max: I think that's right.

[Mike Sproul]

Nick:

OK, here's the quote from the man himself, followed by my comment, taken from my working paper "Three False Critiques of the real Bills Doctrine"

Let us suppose all the countries of Europe to carry on their circulation by means of the precious metals, and that each were at the same moment to establish a Bank on the same principles as the Bank of England--Could they, or could they not, each add to the metallic circulation a certain portion of paper? and could they not permanently maintain that paper in circulation? If they could, the question is at an end, an addition might then be made to a circulation already sufficient, without occasioning the notes to return to the Bank in payment of bills due. If it is said they could not, then I appeal to experience, and ask for some explanation of the manner in which bank notes were originally called into existence, and how they are permanently kept in circulation. (Ricardo, 1811, p. 117.)

In this statement, Ricardo convincingly showed that banks are able to increase the quantity of money. Being imbued with the quantity theory, he considered this as satisfactory proof that banks cause inflation. But the connection between money and inflation should have been the very point under examination. On real bills principles, an increase in the money supply, accompanied by an equal increase in bank assets, will have no effect on prices. But Ricardo, like quantity theorists ever since, ignored bank assets, and did not consider the reasonable proposition that the pound had fallen because the Bank of England's assets (mainly British government bonds) had fallen in value.

[Tom Warner]

I think the definition doesn't work, because it requires precise knowledge of future monetary policy to decide what to call current policy, and that knowledge isn't available.

Helicopter money is explicit monetary financing of fiscal expansion. You're making a valid point that the impact of helicopter money depends on expectations management, but I don't think can feasibly be brought within the definition of helicopter money.

The following are definitely helicopter money:

1 - The central bank creates and gives away money to the private sector (ie two departures from tradition: the central bank assumes fiscal power, the central bank creates money not backed by assets).

2 - The CB lends money to government (by loan or bond purchase), the government increases spending or reduces taxes, and those actions are explicitly coordinated.

So far as I'm aware, everyone proposing HM has one of those two variants in mind.

For the following it's hard to say whether to call it helicopter money, in my opinion:

1 - The CB lends money to government and the government increases fiscal spending, but there is no explicit coordination

There's an obvious distinction between a captive central bank lending money for fiscal expansion on demand, eg Russia, and independent monetary and fiscal policies that happen to coincide or influence each other, eg Europe, but there's also a lot of harder to define space in the middle, eg Japan.

The following are definitely not helicopter money:

1 - The CB lends money to government, the government does not increase fiscal spending. (All this does is change the method of financing of some part of public spending from bond issuance to currency issuance, without changing the flow of spending).

2 - The CB lends money to the private sector (that's also a CB assumption of fiscal power, but this for state credit policy.)

[Tom Warner]

On that very last #2, I mean of course, the CB lends to the non-financial private sector

[Eric Lonergan]

Nick - Let's consider two regimes - (1) is a depression, and, (2) steady growth at full employment. The 'equilibrium' stock of base money is much higher in the depression. Assume we are currently in regime (1) (or the Eurozone!), and the central bank says that it will print money and transfer it to households until it succeeds in shifting the economy to regime (2).

The central bank is also committed to keeping base money at equilibrium - which really means it will be a permanent expansion if you stay in depression and a permanent reduction if you return to growth.

Given that this (probably) describes reality your permanent heli drop is only possible if it fails.

That doesn't seem satisfactory.

So the answer must be as follows: a heli drop does not need to be permanent in order to work because in a depression people in receipt of cash payments really don't care if they will be symmetrically taxed in a future boom. In fact, they would be quite happy with that.

[Nick Rowe]

Eric: Helicopter Money only needs to be "permanent" *relative to the time-path the stock of base money would have followed otherwise*. It doesn't matter if it's permanent relative to where the current stock is now.

If it's permanent in my sense, it has no debt or future tax implications.

Now, you might say that helicopter money in my sense is not needed, and that a temporary bond-financed transfer payment can do the job that's needed, because people are borrowing-constrained for example. But that's a different argument.

[Nick Rowe]

Tom: a financial asset is a worthless scrap of paper with some promises written on it. It's worth as much as those promises are believed. It's 100% expectations. Paper money is the same.

[Eric Lonergan]

Nick, in the example I have given, the stock of base money is lower than it would have been if the central bank had not pursued the helicopter drop.

We may be talking at cross-purposes here - you might have to be clearer about what exactly you mean by "relative to the time-path the stock of base money would have followed otherwise". For example, the macro effects of a helicopter drop might raise the 'equilibrium' level of base money for very different reasons. So, for example, the stock of base money might be higher than it would have otherwise have been, but inflation lower, would this still be 'permanent' in your thinking? Or is 'permanent' fully defined by the intentions of the central bank and beliefs of the households? (If you define 'permanent' as 'not expected by households to have any future tax implications' - even if it does - I'd be fine with that.)

Part of my argument is undoubtedly due to uncertainty. We have *no* idea what "the time-path the of stock base money would have followed otherwise", we don't know what the impact of the helicopter drop is on the equilibrium amount of base money, and there are so many levers to affect demand for base money. Also, if the change in the stock of base money is not 'permanent' is it possible for the transfer to be 'permanent' if it has no future tax implications (or if the implications are lower future taxes).

So let’s say we cannot determine whether or not a cash transfer is 'permanent' - I can't determine it, because I am not sure what you mean, and you can't determine it because even though you know what it means, you can't measure it. Do you think it makes any difference to the effect a cash transfer from the central bank to households would have?

Is it any different to a cash transfer by the government financed by debt which is bought by a central bank under a QE programme subject to an inflation target? It shouldn't be ... but framing seems to matter way more than logic when it comes to the national balance sheet, so in practice, 'yes, it is'.

[Eric Lonergan]

I would also be interested to get your thoughts on the 'contingent reversal'. There is surely a difference between being given $100 in one period, and having it taken back in the next, and being given $100 and having it taken back if your circumstances significantly improve.

[Nick Rowe]

Eric: The clearest thought-experiment is the one I did in my old post, where there is a finite horizon, and all the money is redeemed in the year 2525 (remember that old song?).

Not sure if that helps.

But the current effects depend only on how it affects people's current expectations of the future, not on what will actually happen in the future. If it is *perceived* as permanent then it is permanent. The future affects the present only via people's expectations of the future.

The contingent reversal is interesting. It is precisely those contingent policies that let central banks target things like inflation, the price level, NGDP.

[Nick Rowe]

BTW: I do not know the time-path X(t). And I do not know the time-path X(t)+$100. But I do know that X(t)+$100 will be permanently higher than X(t).

[dlr]

So let’s say we cannot determine whether or not a cash transfer is 'permanent' - I can't determine it, because I am not sure what you mean, and you can't determine it because even though you know what it means, you can't measure it. Do you think it makes any difference to the effect a cash transfer from the central bank to households would have?

I think your questions get to why it can be difficult tell the story of credibility through actions that are currently inert and prospectively variable, like helicopter money in a world with no current convenience yield. The CB starts with some nominal target. If it's credible, meaning if it successfully coordinates expectations, you don't have to do anything except provide the base money when it is actually demanded, with the amount determined by whatever the demand turns out to be relative to your nominal target. The only reason is add helicopter money is if credibility is failing and you think it might help your street cred.

But as you point out, it is still a somewhat confusing signal. For all we know, we will have to vacuum up all the supposedly permanent helicopter money and then some, given a lower-than-expected demand for money at our future nominal target. The best we can say about it that it is simple, in a ceteris paribus sense. All else equal, particularly the demand for money, more base money is clearly looser than less. I agree with Nick this is at least a simpler story than the current interest rate communications nightmare, whose weaknesses are perfectly exemplified by some really smart economists suddenly coming down with total monetary dyslexia.

But the *real* promise implicit in helicopter money is not permanence as much as "we will provide exactly as much money as is required to hit our nominal target at date T+1, and just to prove we are serious go grab a buck and wait outside. You can keep what you catch forever unless inflation compounds faster than 2%." Contingent permanence.

[Eric Lonergan]

"The future affects the present only via people's expectations of the future" - that is a very nice way of putting it. And that is really my point, I don't think anyone in receipt of a check from the central bank would materially change their expectations of how this might change their future circumstances. If they were rational, empirically literate economists, they would expect the future to be brighter - that's what all the evidence suggests. Beyond that, they have no relevant expectation - nor would they if the central bank said the change in monetary base was 'permanent'. Identifying the extreme contingency of the relevant factors surrounding the future path of the monetary base - not to mention its impact on an individual's circumstances - is another way of saying we have no relevant expectations in this regard.

Of course, the other way to square this circle is to say that individuals in receipt of check from the central bank will act as if it is 'permanent' having not really given it any thought!

[Tom Warner]

Nick: Everyone’s well aware that the value of financial assets is in the promises they embody and not in the paper those might be printed on. There’s no reason to harp on that. As I said, your point about expectations being crucial is valid. I agree with you on that, fully. I’m just saying that trying to include promises about future policy in your definition of helicopter money is impractical and unworkable. If a central bank prints money explicitly for it or the government to distribute to the population, that will be called helicopter money, regardless of how likely it’s considered to be that soon taxes will have to be raised and/or interest rates increased to temper inflation.

A lot of the discussion here is just the old Ricardian equivalence debate and could be applied to any stimulus. I don’t believe in full equivalence ever, but surely doing a helicopter drop when inflation is already close to target without raising the target would be a bit like having a balanced budget law and announcing a fiscal stimulus without repealing the balanced budget law. In short, I think for a highly credible central bank the inflation target is by far its most powerful tool, and next is communicating how long-run the target is (ie the length of tolerance of off-target inflation). The rest is just the mechanics of making targets happen, with the caveat that central banks have limited power to boost inflation by themselves, so long as they’re not allowed to spend in the real economy.

The discussion here seems to be focusing on the idea of having the central bank assume fiscal authority and pay money out directly to households. That strikes me as very far-fetched. Explicit monetary financing of government fiscal stimulus is the realistic path that might be tried in Europe or Japan in the next big recession.

[Tom Warner]

BTW I take special interest in this topic because I'm an emerging markets analyst and I see it from the opposite side all the time. EM helicopter money is never explicit, in fact the government and central bank normally promise while doing it to bring inflation down, and then you see the data and they've been printing and spending. And there the whole developed-world establishment is lecturing them to stop it, and applauding those that have stopped it. And there's a whole analytical framework attached - the danger of a low savings rate, high real interest rates, volatile capital flows, over-preference for safe assets, etc. Then I come home and find myself discussing with developed-world economists whether this would be good for developed-world economies. It's like going back and forth through the looking glass between two worlds that never meet.

[Nick Rowe]

Tom: There is currently a debate about whether developed countries should use "helicopter money" as one of the tools of managing Aggregate Demand. The argument in favour is that HM is more powerful than Open Market Operations at the Zero Lower Bound, and unlike bond-financed transfer payments it implies no increase in the national debt and the associated requirement to increase future taxes. And I'm saying that those two arguments in favour of HM are self-contradictory, unless HM is permanent.

The truth or falsity of Ricardian Equivalence is not at issue in this debate. However, it would be easier for me to explain my point if we assumed Ricardian Equivalence, because in that case we would know, by assumption, that Bond-financed transfer payments have zero effect. Just like it would be easier for me to explain my point if we assume Open Market Operations are ineffective at the Zero Lower Bound too. So let's make both those assumptions, even though they are false. Then my point follows immediately. If new money is printed and used for transfer payments, but it is announced that it is temporary and will be withdrawn in future, then it is simply an interest-free loan, which will have no effect by assumption. But if it is announced and believed to be permanent, then it increased net wealth at the existing price level, and so will have an effect on aggregate demand.

Permanent helicopter money genuinely is different, because it works **even if** both OMO irrelevance and Ricardian Equivalence are true. It is more than the sum of the parts.

[Eric Lonergan]

I think Tom is onto something profound. Why is monetary and fiscal policy usually pro-cyclical in emerging markets. Why is no one advocating that Brazil and Russia aggressively ease policy despite relativel severe recessions? Two reasons: 1) they borrow in foreign currency - so a weak exchange is a "tightening", 2) because they are wage- and price-indexed economies. Ironically, rational expectations models are most relevant to EM (or 1970s DM) - because of indexation. Unions and firms in Brazil & South Africa are "rational". This is relevant to helicopter drops - counter-cyclical monetary policy works in the developed world because labour and product markets are deregulated. In Brazil, a helicopter drop might well be negated by an immediate increase in prices. In the developed world today, there is price stability - and expectations are anchored (in the true sense - no one really believes that monetary and fiscal policy are having any effect on prices!). For this reason, a transfer of cash to households is an increase in real wealth. For similar reasons, trying to raise inflation expectations is an extremely bad idea - the population might believe you, and you end up with indexation, and countercyclical policies become redundant.

[JKH]

"because the stock of money will be permanently higher than it otherwise would be" ... etc.

how do you confirm such an outcome - if currency issued by the central bank has a natural growth path into the future that eventually absorbs all excess reserves that are the legacy of a prior QE or HD program ?

[Too Much Fed]

Nick said: "B. I print $100, and give you $100, and at the same time tell you (lead you to expect) that I will take $100 away from you next year, and burn it.

B is not a gift. B is an interest-free loan. The fact that you do not give me an IOU is irrelevant."

JKH, is that a new bond?

Nick said: "B is an Open Market Operation, in which I print $100, buy $100 worth of bonds from you, and reverse that operation one year later. B is not Helicopter Money."

JKH, is that an existing bond?

Does existing bond vs. new bond matter?

[Tom Warner]

Nick: I follow but I think our analytical frameworks are different. You appear to be thinking of "helicopter money" power mainly in terms of hot potato effect, and I think of it mainly in terms of increasing the rate of the fiscal spending flow. I think where IOR and short sovereign rates are similar, the hot potato effect is not much different with a currency emission vs a bond emission. Since that is the situation in developed economies, I don't think it makes much sense to be looking at helicopter money primarily from the hot potato effect angle.

That said, I'm assuming that any helicopter money would be a coordinated central bank and government action simultaneously expanding monetary base, central bank holdings of sovereign debt, sovereign debt stock and fiscal spending flows. I don't believe any central bank is going to just print and give away money to the public, creating liabilities with no assets to back them. That's too far outside tradition, too politically radical.

But if that implausible version of helicopter money did happen, the hot potato effect would be different and greater. I think this is the heart of you're argument and you might want to spell it out plainer. Your point about helicopter money being an increase in net wealth is based on an assumption that the CB would issue money unbacked by assets. Whereas Kocherlakota is assuming that in any helicopter money the central bank would buy sovereign debt, preserving the traditional norms that the central bank always acquires assets with its liabilities and the fiscal role of distributing money to the real sector belongs exclusively to government. But honestly though I don't think anyone anywhere near holding public office is going to seriously consider the unbacked-by-assets version.

[Tom Warner]

Eric: I think the reason no one advocates easing in EMs with inflationary recessions is the inflation. Countries with chronic high inflation and chronic high real interest rates suffer seriously from that, and the priority is to bring inflation down, improve credibility, lower real rates, decrease dependence on foreign borrowing especially foreign currency.

Also many EMs have different systems with commercial banking systems that are state-run or otherwise much more influenced by government authority. Russia being an example. So often even when their fiscal is moderate their commercial banks are pushing out credit like gangbusters and that is driving high inflation often even during recession. In such situations no one's going to recommend fiscal expansion.

Note that I recognize that some of Brazil's and Russia's current inflation are terms of trade shocks, which is somewhat different.

I also recognize that there is no reason to be hysterically over-worried about inflation in the developed world. But it's still jarring to go back and forth between those two worlds, the one trying to revive inflation, the other still struggling to contain it. And it doesn't make me think: be careful what you wish for.

[Tom Warner]

Oops, mental tic on that last sentence. I meant to write: It does make me think: be careful what you wish for.

[Blissex]

So A is an expansionary policy, and B is a plan with an expansionary policy followed by a contractionary policy, but B is called one policy to confuse the readers.

The argument our blogger is making here is that the outcomes may be different whether an expansionary policy is followed or not by a contractionary one.

That seems a somewhat non-interesting argument.

[Blissex]

As to the use of "central bank" this post perpetuates the myth that the way for central banks to do fiscal (usually redistributive) operations is via central bank money creation and destruction, that is that "money" is exogenous to the banking system.

What has been happening in the past 30-35 years is that central banks have been doing very large scale fiscal operations via credit policy, by boosting the supply of credit (by setting leverage ratios appositely) at low interest rates but restricted to property rentiers (and speculators in general) to give them huge capital gains via zooming property prices, what C Crouch has called "private keynesianism".

That could be called here a policy of "helicopter mortgages", which has is a very large scale effectively-fiscal policy designed to achieve redistribution from people with no property or little property to people with more property.

Compared to that most proposals to send everybody, for a change even those who don't own property, a relatively small drop of cash is a small distraction.

[Antti Jokinen]

Nick said: "Helicopter Money only needs to be "permanent" *relative to the time-path the stock of base money would have followed otherwise*. It doesn't matter if it's permanent relative to where the current stock is now.

If it's permanent in my sense, it has no debt or future tax implications."
---------------------------------------

Nick, I think I get your point. But as someone who agrees 100 % neither with Eric Lonergan nor you, let me try to solve this impasse regarding permanence:

It seems to me that your statement "X(t)+$100 will be permanently higher than X(t)" doesn't describe reality. That is because X(t) itself will change if we use helicopter money. We don't have any clear understanding of how we arrive at a certain stock of base money at any given point in time -- or is someone able to write out the function? I doubt it --, but we can be sure that a change in policy (and even in the rules of the system) as significant as the adoption of helicopter money will affect X(t) itself.

So I think Eric is right in questioning even this kind of permanence.

But if I'm not mistaken, you have -- outside this X(t) argument -- correctly identified the permanence which really matters here. And that has to do with expectations affecting the future path of inflation. The permanence which matters here has nothing to do with the whole *stock* of base money, but with the fact that when engaging in "helicopter drops", the authorities try to convince the public that there is now *some* base money that is not backed by any (genuine) liability. When we look at the left-hand side of the CB balance sheet, we can see what kind of backing base money has (the Fed calls these "Factors Affecting Reserve Balances"). There are private liabilities (eg, loans to commercial banks, and MBSs), liabilities incurred by the government (these are indirectly private liabilities; incurred on behalf of the people) and even gold. For helicopter money to be helicopter money, there should be an addition to the left-hand side of the CB balance sheet (matching the addition to base money on the right-hand side; credit=debit), but this addition should somehow not represent a genuine liability. In other words, we need to add a fake liability. This can take, for example, the form of a perpetual (perhaps even zero coupon, to really drive the point home) government bond or a coin with a large face value -- say, $100B --, both of which are sold by the Treasury to the CB in return for a credit on the TGA (from which it will be further credited to private accounts, becoming part of "base money"). But this is not enough. In addition, the CB has to convince the public that it will never sell this "asset" (if it sold it to the Treasury later, then we could conclude, ex post, that it was genuine government debt like any other). Only in this way can it try to convince the public that there is now base money which is not backed by any genuine liability (~ an asset of non-zero value).

If I'm not mistaken, Eric Lonergan cannot agree with what I write in the paragraph above. He doesn't view a government bond in the hands of the CB as representing a genuine (ie, not fake) liability. Eric has talked about contingency (referring to Mervyn King). It *might* be that the CB is going to sell the bond later, which would somehow make the genuine liability -- which wasn't there when the CB held the bond -- reappear. But of course the time will come when the bond matures, and then the Treasury is expected to buy the bond (and the CB to sell it). So this hinges not only on the CB's decision to sell it, but also on the CB's decision to roll it over when it matures. Were the CB to convince the public that there is a certain stock of government debt it holds which it will continue to roll over until the end of time, then this would be very similar to holding a perpetual bond which the CB would say it will never sell (this assumes that the Treasury will never decide to buy it), and thus we could talk about helicopter money in this case, too. How convincing any of these declarations by the CB would be remains, of course, to be seen (Bill White has written about this in a reply to Adair Turner: https://www.project-syndicate.org/blog/overt-monetary-financing--omf--and-crisis-management).

The impact of helicopter money can never be understood through the lense of Quantity Theory of Money, or anything that smells of it. The point of helicopter money is to be "a little bit reckless", which would have mainly a psychological effect: it would lift inflation expectations. Helicopter money is supposed to -- even if not even all its proponents realize this -- undermine the public's trust in the currency, if only so slightly. The problem with this is that trust doesn't follow any linear path, at all. The Quantity Theory might suggest a more linear effect ("We can always micromanage the stock of base money, and reverse our actions if need be. Runaway inflation is not possible."), but the Quantity Theory has very little to do with reality.

My current understanding is that the higher inflation expectations (through diminished trust in the currency) which can be attained through helicopter money are also attainable through higher government deficits. But those deficits, which would be an implicit way to achieve what helicopter money does explicitly, would need to be much higher. Would a 15 % budget deficit (to GDP) make the public suspect that the government is misusing, or using too freely, its ability to spend without any clear budget constraint? I don't know. But I know that the public would be more inclined to conclude that the government is misusing its ability to spend if the government (in liaison with the CB) would tell the public that it, indeed, is the case.

I'm not suggesting that helicopter money is a clear concept even for me. Discussing it in a meaningful way is made almost impossible by (a) our varying ignorance when it comes to what money is and how the monetary system is linked to the real economy, and (b) different definitions we attach to helicopter money. I think it's useless to discuss helicopter money before we find common ground in (a) and (b). Right now, I'm so far, for example, from Eric Lonergan -- who is a very, very smart guy -- on point (a) that it doesn't make much sense to discuss money with him. One of his axioms is that money is not debt -- money is something which is used to pay debts. For Eric, there is no genuine liability behind money -- for him, suggesting otherwise just reveals a misunderstanding which is based on an accounting convention.

In other words, we all -- and the science called economics -- need to take a leap in our understanding around money. This is the most pressing problem in economics. It is also the so far eternal problem in economics, and was pressing also in the 1930s. It is this problem I'd like us to solve before we dive any deeper into helicopter money ;-)

[Blissex]

«But if I'm not mistaken, you have -- outside this X(t) argument -- correctly identified the permanence which really matters here. And that has to do with expectations affecting the future path of inflation.»

I think that our blogger is trying here to define "expansionary policy", not "permanent policy". In two ways:

* As to the size of an expansionary policy needed to be effective, as in «*relative to the time-path the stock of base money would have followed otherwise*».
* Whether it can be called "expansionary" if it is possibly followed by an opposite contractionary policy.

The second argument seems to me quite pointless. A policy by itself can be called "expansionary" if it is effective in being so, whether it is followed or not by a contractionary one, so as to that our blogger is playing word games.

It would not be word games if a mechanism like ricardian equivalence were invoked, where some *effects* of a policy are *necessarily* such to counteract its other effects, making it ineffective overall, but our blogger IIRC has explicitly disclaimed recourse to that.

[Antti Jokinen]

I see your point, Blissex. But I don't see it that way. Expansionary policy, if I interpret you correctly, is something conventional. Helicopter money is supposed to be very, very unconventional, even forbidden (Adair Turner calls it a "taboo"). Of course, you might use the word 'expansionary' in a broader meaning here. Could it be that what you're after is "Who cares if the promise is eventually broken, if people take it at face value when it is made"? To me the 'promise' is about adding a fake asset (zero value; assets usually reflect someone's liabilities, but in this case the CB would explicitly inform the public that there is no corresponding liability) on the CB balance sheet and promising that it will stay there.