Wednesday, September 14, 2016

Claudio Borio (BIS) on Helicopter Money

Claudio Borio (BIS Economist) comes out against the idea of Helicopter Money we are hearing about these days. Below are a few excerpts from his recent speech on this.

"Since the Great Financial Crisis, central banks in the major economies have adopted a whole range of new measures to influence monetary and financial conditions. The measures have gone far beyond the typical pre-crisis mode of operation - controlling a short-term policy rate and moving it within a positive range - and have therefore come to be known as "unconventional monetary policies." To be sure, some of these measures had already been pioneered by the Bank of Japan roughly a decade earlier in the wake of that country's banking crisis and uncomfortably low inflation. But no one had anticipated that they would spread to the rest of the world so quickly and become so daring, testing the boundaries of the unthinkable.

As growth has remained disappointing and inflation stubbornly below targets, the range and size of these measures have increased. Hence the growing use of long-term liquidity support, large-scale asset purchases, sizable increases in bank reserves (so-called QE) and, of late, even the introduction of negative policy rates. In the wake of these measures, the central banks' monetary base (cash and bank reserves) has ballooned in step with the overall size of their balance sheets.

With central banks delving further down into their box of unconventional tools, calls for them to take a deep breath and pull out "helicopter money" have intensified. What was just a thought experiment designed to shed light on how money affects the economy is now threatening to become a reality. Proponents of this tool - more soberly described as "overt money financing" of government deficits - see it as a sure-fire way to boost nominal spending by harnessing central banks' most primitive power: their unique ability to create money at will. But can helicopter money work in the way its proponents claim? And is the balance of benefits and costs worth it? Our answer to both of these questions is no."

My added comments: Readers should take time to read this full speech text, but this concluding paragraph gives you an idea of what Mr. Borio thinks about where things are going if "helicopter money" is really tried:

"And therein lies the danger. It is hard to imagine helicopter money not ending up in fiscal dominance, the outcome that would obviously be inevitable in its purest form, where interest rates are kept at zero forever. Sooner or later this could indeed erode the value of money, but at the cost of losing the public's confidence in our monetary institutions - a trust so painfully gained over the years - and with unpredictable consequences. It would be a Pyrrhic victory."

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