'Helicopter money' the next monetary policy tool

'Helicopter money' the next monetary policy tool
'Helicopter money' the next monetary policy tool

A recent report by NAB Economics speculates that 'helicopter money', money sent by a central bank to households or a fiscal stimulus funded by the central bank will be the next 'unconventional' tool used to combat established monetary policy tools that are either ineffective or exhausted.

According to NAB such helicopter money should result in some combination of inflation and real economic growth and has implications for interest rates settings, bank inflation targets and other aspects of central bank policy.

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'Helicopter money' the next monetary policy tool

"The fundamental choice open to a central bank is either to target the quantity of money or the price (‘interest rates’)... the only purpose in changing these rates are to influence market determined rates (i.e. those for home mortgages, business loans etc)," NAB said.

 "In the case where the monetary policy is not meeting its existing target – particularly where inflation is too low – helicopter money could be calibrated towards achieving that target rather than a new one. Indeed one of the reasons it is being advocated is the inability of central banks currently to meet their inflation targets.

"The two main ways it is expected to work in boosting the economy are: A direct boost to spending – most obviously when the Government is the ultimate recipient of the money and spends the money on goods and services – or by households lifting their spending (except in the unlikely event they save all the money they are given) and hHigher inflation expectations as a permanent increase in the base money should increase inflation. This in turn should reduce the real rate of interest giving households an incentive to consume now and business to invest.

"Proponents argue that it gets around some of the problems often raised with fiscal policy.

"With normal fiscal stimulus, the Government issues debt on which it has to pay interest. This can give rise to concerns about the future, e.g. of higher taxes causing people to save any tax cuts or cheques they are given. However, with Helicopter Money neither the government or households ever pay the money back and pay no interest. As a result households should see any increase in money they receive as an increase in wealth, or if Government is the recipient, it should be free to spend without adding to fiscal problems.

"Another concern with normal fiscal stimulus is that additional government debt can lead to ‘crowding out’ if higher government borrowing leads to higher interest rates. Again, as the monetary stimulus should put downward pressure on (real) interest rates crowding out is less likely (assuming there are unutilised or underutilised resources in the economy)."

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