Claudio Borio, and his colleagues, incinerate a straw man. Helicopter money – sensibly defined – does not involve any new commitments about future monetary policy. So Borio’s arguments are not even relevant.
At the same time Borio’s paper fulfils a useful purpose: policies based on ‘permanent’ changes in the monetary base are a blind alley – either ill-defined, tautologous, or implausible. Usually all three. After all, nothing is permanent.
Eric, the concern of Borio, Disyatat and Zabai is valid.
Basically they ask themselves: “where does the newly ‘printed’ helicopter money go?” It is going to end up as extra reserves of commercial banks at the central bank. When people deposit the new bills at a bank, the bank can only keep the bills in a vault or deposit them at the central bank, which is equivalent to saying that the bank’s reserves increase. But the banks didn’t ask for these reserves.
So the question is: will the central bank pay interest on these new reserves?
*) If not, the banking system is stuck with an asset that has a fixed nominal value and that it as a whole cannot get rid off. But banks have costs, so these reserves are a kind of tax on banks. Unlike other assets that do not generate any income (like gold), the nominal value of the reserves will not even rise with inflation.
*) If the central bank does pay interest on the new reserves, where is the central bank going to get the money to do so? Remember that it did not receive income generating bonds in return for the helicopter money. So either the central bank is going to print the future interest on the reserves (meaning eternal helicopter money for the banks), or the government is going to have to pay the central bank so that it can pay interest on reserves to the banks.
Jan – what you say is true. But a couple of key points take precedence. Perhaps most important is that successful counter-cyclical policies raise the level of output and likely medium-term growth rates, so fiscal positions (and private sector balance sheets) are healthier. There is a free lunch. (For similar reasons, Ricardian equivalence is not wrong because of implausible assumptions of hyper-rationality, but because forward-looking households should expect to be better off in the future if the government engages in successful counter-cyclical policies).
Secondly, the policy of transfers to households from the central bank, as Simon Wren-Lewis, Mark Blyth and I have described it, does not require any new long-term commitments from the central bank. In fact, if they need to in the future they should raise reserve requirements etc., in order to maintain their inflation targets.
Thanks Eric,
I agree with you that helicopter money really is a free lunch.
The reason for my comment above is that Nick Rowe and Brad DeLong do not understand the argument made by Borio et al. That’s why I wanted to simplify what I read as the core message of Borio’s article.