Helicopter Money Policy Formulation

The following is a guest post from fellow Monetary Realism contributor JKH

An important aspect of helicopter money is just how a central bank would obtain the authority to undertake such a policy. Eric Lonergan is a leading proponent of HM. As he points out, the resolution of this issue could depend on the institutional regime for the central bank in question. For example, it may be quite different in the case of the ECB than for the Fed, the Bank of Canada, or the Bank of England.

In all cases, however, the delegated authority should be clear in delineating how helicopter money relates to standard fiscal and monetary policy responsibilities. I left the followingcomment along these lines at Eric’s post on the institutional perspective:

I agree that institutions matter. And words and definitions should be used carefully for framing and communicating the policy. That’s why I think it is helpful to sort out the use of the terms fiscal policy and monetary policy as best as possible. Some influential types like Michael Woodford use fiscal policy in the description of helicopter money from the get go. So the issue of semantics can’t really be avoided. If connection between fiscal policy and monetary policy is made as clear as possible, all the better.

If helicopter money ends up being done in a notable way, the effectiveness of it will have something to do with its announcement power and that the central bank is seen to have the authority to execute policy with something quite novel in its “tool-kit”. It is in that sense that I believe there is at least potential for it to have a greater effect than say – for example – an economically equivalent policy (some would say) of government spending or transfer payments financed by Treasury bill issuance.

Central bank operations have a fiscal effect in their conventional scope. This arises from the profit (or loss) contribution resulting from a CB’s financial intermediation activity.

Unconventional operations such as qualitative or quantitative easing expand the scope of asset activity and increase the size of the monetary base beyond conventional trends.

In general, it is the asset and liability classes involved in these conventional and unconventional policies that define the scope of permissible financial intermediation activity.

Helicopter money differs from these conventional and unconventional monetary policies in the timing relationship between government spending or transfers and corresponding money financing. With either OMO or QE, , there is obviously a requirement for some type of standard fiscal action to have been undertaken in the past so as to create the budget deficit conditions for the issuance of government debt that is available to purchase from the market place. With HM, money financing supports spending or transfers that are essentially concurrent with the financing.

The proposals generally floated for helicopter money include several variations on operational arrangements. The one that seems to involve the central bank for the most part is the example of transfer payments made by a CB directly to households without operational involvement by Treasury. The payments are directly monetized to bank money and bank reserves. A different route involves Treasury at the operational level, with the central bank directly crediting the Treasury account (i.e. without the intermediation of bonds), from which Treasury spends or transfers funds that are subsequently monetized in the form of private sector bank money and bank reserves. A third option includes a central bank that acquires government debt newly issued to finance concurrent payments from the Treasury account, with those payments subsequently monetized in the form of bank money and bank reserves. This last option can be viewed as the logical limit of QE – the limit as the time lag between Treasury debt financing and central bank purchase of that debt goes to zero.

A consistent timing nexus is evident in all of these proposals. It is perhaps most clearly delineated in the third case of concurrent bond and money creation – seen as the limit of QE as the time lag between fiscal and monetary operations goes to zero. But in all three alternatives the same relationship holds between the timing of a standard type of fiscal action such as spending or transfer payments and the timing of money creation – it happens at essentially the same time. There is no lag. I think this timing consideration is the key to delineating a natural fiscal and monetary policy nexus for helicopter money. If fiscal policy is defined to include spending or transfers, and if monetary policy is defined to include monetary base creation, then HM has a dual fiscal and monetary policy characteristic.

Where does this leave us in terms of framing of fiscal and monetary policy vocabulary in the case of helicopter money?

I’m not a fan of the “already doing it” interpretation of standard central bank activity as it relates to helicopter money. For example IOR (including recently implemented tiered structures in a negative interest rate setting) is a matter of the interest expense structure, which is a subset of the profit determination which in turn becomes the standard central bank fiscal contribution in a structural sense. While it may be tempting to attach economic interpretations of tax-like properties in some cases, this is a structure that is determined by the central bank and therefore is part of monetary policy proper. Moreover, the motivation for the expense structure has much to do with operational requirements corresponding to interest rate policy objectives for the central bank. The same technical argument cannot be made for helicopter money – other than in a somewhat indirect way. Therefore, I see no persuasive interpretation of IOR as a precedent for central banks assuming the helicopter file as core monetary policy.

I am sympathetic to the idea that – if the central bank does it in fact – it’s monetary policy. Monetizing either financial assets or standard concurrent fiscal payments is monetary policy in that sense, be that OMO, QE, or HM. But that’s only one side of the transaction. The other side is the fiscal characteristic of the act of spending or transfer. And if it turns out that the two acts are coincident – as in the case if a central bank were to make a standard type of transfer payment to a household – then that coincidence is one of fiscal and monetary policy. And the central bank in that case executes both fiscal and monetary components. The policy implementation responsibility is a composite one – including a received delegation of authority to act in a standard fiscal capacity, which is clearly different than is the case for the standard financial intermediation contribution of the central bank.

However, such a delegated HM authority has a natural origin in an overarching fiscal policy framework that ideally should include the formulation of an overall spending and transfer capacity – adjusted appropriately for the risk implications of corresponding financing mix – with the central bank being delegated an authority to take on some of that capacity in the form of a dual-policy helicopter mandate. Such a “risk allocation” approach puts fiscal policy at the heart of HM.