What’s Top of Mind? 'Helicopter Money'
Nearly eight years after the onset of the global financial crisis, growth and inflation in the major developed economies remain tepid despite generally aggressive central bank action. With even unconventional policy measures like negative interest rates seemingly coming up short, out-of-the-box approaches are starting to gain focus, especially the concept of "helicopter money"— a form of monetary finance, whereby the central bank finances fiscal stimulus through money creation.
In the above video and following Q&A, Allison Nathan, senior strategist for Goldman Sachs Research and editor of the division’s Top of Mind publication, walks through the mechanics of monetary finance, as well as the arguments for and against it.
Q. What is monetary finance?
A: Monetary finance is a policy whereby the central bank finances fiscal expansion by increasing the monetary base, or the total bank reserves and currency in circulation (in essence, “printing” money). This creates room for more official spending without increasing the government’s future debt service burden. A common example is “helicopter money,” a term economist Milton Friedman coined in 1969 to describe the idea of a central bank printing money and distributing it to citizens. However, the monetary expansion could be used to finance a different form of fiscal easing, such as a tax cut or an infrastructure investment by the government. All of these options can be one-off or repeated.
Q: What is the goal of monetary finance?
A: Monetary finance aims to boost nominal GDP by increasing overall spending on goods and services—be it by enabling the government to increase its own spending and hiring, or by increasing the private sector’s wealth. The latter can take place through a supplement to incomes or a reduction in taxes; the hope is that the private sector will spend some of this newfound wealth.
Q: How would it work?
A: The central bank provides the government money that the latter otherwise wouldn’t have. To do so, the central bank can “print” money and:
- Transfer it directly to the government’s account;
- Use it to buy government debt and record that debt as an asset that earns no interest and returns no principal; and/or
- Use it to buy government debt and commit to rolling over that debt perpetually. (The commitment to permanence is a critical element that distinguishes this last option from QE.)
In today’s context, monetary finance could also be deployed by forgiving or perpetually rolling over government debt already on central bank balance sheets.
Q: What are the key arguments for and against it?
A: Proponents argue that:
- Other options are limited, as monetary policy offers diminishing marginal returns, while scope for debt-financed fiscal easing is constrained.
- Monetary finance would be highly effective: Greater public spending guarantees an increase in aggregate demand, while supplementing the private sector’s income would increase wealth more directly than a rise in asset prices via QE.
- Unlike debt financing, monetary financing does not “crowd out“ private investment by pushing up interest rates for other borrowers.
Opponents argue that:
- Monetary finance opens the door for political influence over central bank actions, potentially compromising central bank credibility and effectiveness.
- Monetary finance could fuel self-fulfilling expectations for ever-higher inflation.
- Monetary finance offers governments an attractive, near-term policy option that could lead them to “kick the can down the road” on the pursuit of other reforms and/or fiscal adjustment.