by Donato Masciandaro
It also happened with the Covid-19 recession: the helicopter money option appears whenever there is a significant economic crisis. But then, the helicopter never flies. Politics can explain this economic taboo. The European Central Bank could define a socially optimal helicopter money for financing European Perpetual Bonds. But as the redistributive effects of helicopter money increase, the risk of hostility towards the central bank increases, as the recent decision of the German Constitutional Court showed. For this reason, a Covid-19 helicopter money could be technically feasible but it’s politically unpalatable.
In economic thinking, the COVID-19 pandemic forces swept away many of the conventional taboos, such as the radical idea of a helicopter drop – printing money and handing it out to people with no strings attached (Financial Times 2020a, Yashiv 2020). The term uses the fanciful imagery originally invented by Milton Friedman (1968).1 Even the head of the French central bank Francois Villeroy de Galhau has floated the idea of printing money to give directly to companies.
This is nothing new: whenever the economic conditions become critical, the radical idea of helicopter money re-emerges (Reichlin et al. 2013, Baldwin 2016). But then the helicopter never takes off. Why? One reason could be the economics of helicopter money: given its potential pros (Caballero 2010, Muellbauer 2014), cons are present too (Perotti 2014, Borio et al. 2016). Then, this ‘beyond unconventional policy’ (Baldwin 2016) could be just a too risky economic policy lever. The political economy perspective can offer another view: the redistributive effects of helicopter money minimize its political feasibility. Today’s COVID-related debate can be read in such a way.
What is ‘helicopter money’?
The recent discussion about helicopter money involves two separate policy issues. The first is how to create a financial backstop for households and firms through monetary cash transfers. The second is whether and how to involve the central bank in financing this backstop through direct monetization.
Direct cash handouts have already happened in two concrete instances. In February 2020, the government of Hong Kongtransferred HKD 10,000 (USD 1,270) to all residents financially affected by the virus, as part of its overall policy response (Quah 2020, chapter 11). Similarly, the government of Singapore provided small cash payments to all adult Singaporeans (Financial Times 2020). Other direct cash handouts have also been announced. Moreover, in 2009, the Australian government implemented a similar policy when it sent cheques to most taxpayers (Grenville 2013).
However, fiscal cash handouts are not automatically helicopter money. The same is true for any general mix of monetary and fiscal policies under which expansionary fiscal measures are financed by creating a monetary base (Carter and Mendes 2020). As such, we need a definition to avoid ambiguities (Blanchard and Pisani-Ferry 2020).
Given that the state and the central bank have separate balance sheets, we assume that helicopter money is in action when there is an outright money-financed fiscal transfer that produces losses in the central bank’s balance sheet (Gali 2020, chapter 9). Our definition implies that a direct central bank money transfer is neither a necessary nor a sufficient condition for a helicopter money action, while some proposals suggested that a direct channel is more likely to be effective due to both higher consumer spending and higher inflation expectations (Muellbauer 2014). This is true even though some analyses cast doubt on whether it makes any difference that transfers come from the central bank or the government (Van Rooij and De Haan 2016). Needless to say, no central bank’s role as public debt manager implies any helicopter money, provided that – as in the case of the Bundesbank (Deutsche Bundesbank 2018) – the central bank does not grant any loan, nor does it take any state security into its own portfolio acting as public debt agent.
Moreover, we can have helicopter money without a permanent increase in noninterest-bearing central bank liabilities (Reichlin et al. 2019, Buiter 2014, Borio et al. 2016, Bernanke 2016). Finally, this form of helicopter money differs from conventional and unconventional central bank asset purchases financed by issuing central bank reserves, as it represents an intended loss on the central bank’s balance sheet. In this case, the corresponding public liabilities are irredeemable. Table 1 on Monetary Policy Options, Money Base Growth and Central Bank’s Balance Sheet summarizes the different options:
|MONETARY POLICIES||PERMANENT MONEY BASE GROWTH||CENTRAL BANK’S BALANCE SHEET LOSSES|
|Central Bank Asset Purchases||NO||Random and Unintended Effect|
|Hard Helicopter Money||YES||NO|
|Soft Helicopter Money||NO||Systematic and Intended Effect|
Source: Masciandaro, 2020
However, the economics of a helicopter money option do not address the crucial political issues involved. Extant research (Turner 2015, Bernanke 2016) emphasizes that, in general, political concerns are perhaps the most important reason to view helicopter money as a last-resort policy. In a recent paper (Masciandaro 2020) we show how even though the design of socially optimal helicopter money policy is possible, its feasibility is unlikely due its redistributive consequences.
Pandemic recession, fiscal backstop and helicopter money
The economy consists of a population of citizens, a government and a central bank. The citizens draw utility from consumption and disutility from labour and have financial assets and liabilities. If a pandemic occurs, any containment policy has economic costs; citizens suffer economic and financial losses that dampen their balance sheets. The government can absorb financial losses by implementing a fiscal backstop using cash transfers with the aim of keeping liquidity running (Baldwin 2020).
How can the cash transfers be financed? The government can raise taxation or issue debt. The latter can be purchased by either citizens or the central bank. However, helicopter money is not a free lunch; it may create monetary externalities. The backstop monetization is linked to increasing monetary stability risks. Indeed, the monetary expansion associated with the central bank’s losses can threaten the monetary stability goal when the pandemic-related recession ends. In identifying the optimal helicopter monetary policy, we assume that as the central bank is independent from politics and it acts as a long-sighted social planner.
In the European Union setting, a natural application of the policy mix between a fiscal backstop and helicopter money is the implementation of a European Transfer Plan (Bènassy-Quèrè et al. 2020a). Such a fiscal backstop could be financed through European Union assets (Garicano 2020, chapter 14) by issuing COVID Perpetual Bonds (Giavazzi and Tabellini 2020) via a specific vehicle or, alternatively, through the ESM (Bènassy-Quère et al. 2020b), with the European Central Bank (ECB) acting as buyer of these bonds. The ECB could credit the governments’ accounts with a reduction in its capital (Gali 2020).
The ECB’s action must be motivated by an independent evaluation of its Board that a decision to hold or permanently keep such perpetual bonds on its balance sheet (and the corresponding losses) will not harm its capacity to pursue its monetary-stability goal in the medium term. It must also believe that this will be an effective European economic tool. In so doing, the ECB will consider the constraints in increasing the tax revenues as well as the costs of debt issuance for the different European Union members with its likely domino effects. In this respect, it would be prudent to avoid triggering the fifth wave of rapid global debt accumulation and the consequent Euro redenomination risk, as the four previous waves ended with widespread financial crisis (Kose and al. 2020). This could be a case of a European helicopter money, but would this European policy mix be politically feasible? Here the cost/benefit analyses of national governments come into play
One type of helicopter money doesn’t fit all
If politicians are in charge and citizens are heterogenous, different economic policies have relevant redistributive effects. In fact, the net transfers implied by efficient policies can be positive for some and negative for others. Cash money transfers and bond remuneration can influence the welfare of individual citizens differently when they are heterogeneous. However, as we noted before, if a policy task has distributional effects, the politicians would like to control those effects.2
The distributional effects enter the picture because the mix of a fiscal backstop and helicopter money produces the ‘three D’ (distributional, directional, duration) effects (Goodhart and Lastra 2017). The distributional effects result from changes in interest rates. The directional effect captures the impact of public policy on a certain sector and/or constituency of the economy.3 The duration effect measures the monetary policy’s effect on overall public-sector liabilities, including the central bank’s balance sheet. The duration effect is associated with the dimensions and risk profile of the central bank’s balance sheet with its increasing relevance in the perimeter of monetary policy (Reis 2013).4
The redistributive effects are relevant as long as the policies are chosen through the political process, i.e. when the citizens vote. The leverage of the median voter will tell us whether the subsidized citizens represent the majority or a minority of the population. At the same time, the financial wealth of the median voter signals whether the wealthy voters represent the majority or a minority of the population. Each voter’s preferences can differ from those of the central bank because of these two terms, representing the political distortion due to citizen heterogeneity. More specifically, given the fiscal backstop, the number of citizens against the helicopter money will be higher if: a) the majority of voters are wealthy, b) the interest rate is higher, c) the monetary stability risks are higher.
A perception of an unfair monetary policy can contribute to various forms of resentment and lead to hostility against the central bank. This possibility is even more evident in these days, after the judgment that the German Constitutional Court delivered on the legality of ECB bond buying program few days ago. In fact, the Court’s judgement is based on arguments regarding the monetary policy’s effects on ‘public debt, personal savings, pension and retirement schemes, real estate prices, and the keeping afloat of economically unviable companies’, all of which are redistributional issues (although following the Court interpretation they have been summarized within the legal category of the ‘principle of proportionality’ that the ECB shall respect in achieving its monetary stability aim).
Moreover, the more the politicians in charge accommodate the demand for a level of helicopter monetization that differs from the central bank’s optimal level, the greater the likelihood of political pressure. The motivation is straightforward. Political pressures on the central bank may be relevant in shaping the actual monetary policy decisions if the government in charge can threaten in some way the central banker role. For example, if the institutional setting is such that any incumbent government in extraordinary times can retain the option to override the central banker’s decision, the central banker can have the temptation to accommodate the political wishes in order to avoid being overridden.5
In the case of the European Union, the hostile sentiments against the ECB’s monetary policies can be a factor to consider when explaining the various forms of nationalism, populism, and Euroscepticism (Morelli 2020). Moreover, if we assume that a correlation holds between the opinions on the so called ‘Corona Bond’ and the hostility against any kind of ECB monetization, the current debate – for example in Germany (Waltenberger 2020) – can offer interesting insights.
All in all, the more the citizens are heterogeneous and the more the elected representatives are career-concerned politicians, the more it will be true that the helicopter money the independent central bank would like to implement will not fit the political preferences. In such situations, political pressures on the central bank are more probable, while a helicopter monetary policy becomes unlikely.
1 Friedman M., 1969, The Optimum Quantity of Money, in M. Friedman, The Optimum Quantity of Money and Other Essays, Chapter One, Adline Publishing Company, Chicago.
2 Alesina A. and Tabellini G., 2007, Bureaucrats or Politicians? Part I: A Single Policy Task, American Economic Review, 97(1), 169-179.
3 Brunnermeier M.K., and Sannikov Y., 2013, Redistributive Monetary Policy, Jackson Hole Symposium, September 1st, 2012, The Changing Policy Landscape, Federal Reserve Bank of Kansas City, pp. 331-384.
4 Curdia V. and Woodford M., 2011, The Central Bank Balance Sheet as an Instrument of Monetary Policy, Journal of Monetary Economics, 58(1), 54-79.
5 Lohmann, S., 1992, Optimal Commitment in Monetary Policy: Credibility versus Flexibility, American Economic Review, 82, 273-286.
Donato Masciandaro is a Full Professor of Economics at Bocconi University, where he holds the Chair in Economics of Financial Regulation. Since 2015 he has been President of the BAFFI CAREFIN Centre for Applied Research on International Markets, Banking, Finance and Regulation. He was previously Director of the Centre (2008-2014).