Written by Cemal Karakas,
The economic crisis has led to stagnation in the EU, and in some euro-area countries in particular. Several experts have advocated ‘helicopter money’ as a way of jump-starting the economy by combatting deflationary tendencies and boosting investment. Helicopter money, or ‘helicopter drops’ of money, generally refers to a non-standard monetary policy tool used in deflationary conditions. It can be understood as a permanent increase in the nominal stock of fiat base money at lowest nominal interest rates. One of the first and most prominent advocates of helicopter money is the former chairman of the United States (US) Federal Reserve, Ben Bernanke. In a speech to the US National Economists’ Club (November 2002), Bernanke warned of deflation, and suggested helicopter money as one means to boost the economy. The discussion on helicopter money is highly relevant in the EU where, since 2013, the European Central Bank (ECB) has struggled to effectively tackle low inflation, despite cutting its main interest rate and introducing quantitative easing. Quantitative easing has raised asset prices and caused the euro to depreciate, but the new money has failed to stimulate inflationary expectations. In addition, the euro area is facing a decline in investments and considerable GDP output gaps. This is where helicopter money could help, say its advocates.
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In practical terms, there are different proposals for distributing helicopter money, which may entail fiscal policy measures, such as government bonds, or printed-money financed tax relief for private households. Some experts have concrete proposals on how the idea of helicopter money could be implemented in the euro area. Eric Lonergan, for instance, proposed that the ECB should announce a targeted longer-term refinancing operation (TLTRO) programme, through which it would provide perpetual, zero-interest loans to banks. In turn, banks would have to extend these loans on the same terms to the public in euro-area countries. According to Lonergan, members of the public would be able to apply for a loan up to a specified maximum per adult, say €600. Banks could provide the loan in the form of a deposit, a cheque, or cash. At zero interest rates, this process would have ‘no net impact on the ECB’s balance sheet’ since accounting liabilities (such as bank reserves) would rise by the same amount as assets (such as perpetual loans).
Some empirical studies show that tax rebates have had positive macroeconomic effects in certain countries. In 2001 and 2008, for instance, there were tax rebates in the US. A study from 2006 analysed the 2001 rebate. One of its main conclusions is that 20-40% of the rebate was spent in the quarter in which the cash was received, and about another third in the following quarter. A study of the 2008 tax rebate concluded that ‘households spent 12-30% (depending on specification) of their payments on non-durable goods during the three-month period of payment receipt, and a significant amount more on durable goods, primarily vehicles, bringing the total response to 50-90% of the payments’. In a study of the 2009 ‘tax bonus’ in Australia, it turned out that around 40% of the bonus was spent in the quarter it was received.
There are, however, critical views and questions about the legality of helicopter money. Some experts believe it is permissible under EU law, citing Article 20 (Other instruments of monetary control) of the Protocol on the European Central Bank’s statute. The ECB itself has a rather reluctant stance, arguing that the very idea runs counter to Article 123(1) of the Treaty on the Functioning of the European Union, which prohibits the direct financing of public expenditure.
Besides legal uncertainty, helicopter money is criticised from an economic point of view. Some experts argue that it would have a negative impact on public sector (or central bank) balance sheets. Another reason why independent central banks are cautious about helicopter money is that they want an asset that they can later sell after the economy recovers. As Simon Wren-Lewis states, quantitative easing gives central banks that asset, but helicopter money does not. Others say it may prompt indebted euro-area countries to pull back from unpopular fiscal and structural reforms. Helicopter money, it is argued, could also reduce the incentive to work or undermine the stability of the euro, by triggering ‘runaway’ inflation.
Michael Woodford has offered a possible solution to this dilemma. He suggests a policy that could deliver the same effect as helicopter money, but would preserve the traditional separation between monetary and fiscal policy. His proposal focuses on a version of flexible inflation targeting whereby the central bank commits future monetary policy to a permanently higher nominal target (than the ECB’s below, but close 2% inflation target over the medium term), such as the path of nominal GDP. This would also include permanent increases in the monetary base via fiscal transfers, but the central bank would not be involved in making transfers to private parties.