The Return of Helicopter Money? Short Cut with Sascha Bützer and Dorothea Schäfer

IMF economist Sascha Bützer presented an old idea in a new guise in this week's Short Cut: Helicopter money in the form of direct central bank transfers.




25. AUGUST 2022



Imagine the ECB would have transferred €500 to every citizen of the Eurozone when the pandemic hit, instead of buying assets worth €1,850 billion. If this response could have been a reasonable policy measure, was the topic of this week’s new Short-Cut. The basis for the discussion formed a new study by IMF economist Sascha Bützer, who presented his findings and discussed them with DIW economist Dorothea Schäfer.

Sascha Bützer started by presenting his concept of outright transfers (OT), which he proposed to be included in the toolkit of central banks. The basic idea is simple: the central bank would transfer money directly to households within the existing payment infrastructure or through central banks’ digital currencies, immediately augmenting base money. Hence, it is clear that OT would not be a permanent policy tool, but could rather put into practice under exceptional circumstances. Bützer presented it as alternative to quantitative easing and monetary financing of fiscal deficits.

Why would there be a demand for such a policy at all, what are the problems of the asset purchasing programs? Most importantly, QE has led to rising wealth inequality by inflating asset prices which has disproportionately benefitted households at the top end of the distribution. Additionally, the effectiveness of QE in stimulating aggregate demand by lowering the long-term interest rate has been questioned in recent years. Direct transfers would tackle both problems, as they would come with less negative distributional effects and would also more effectively raise aggregate demand.

The downside of OT is that in contrast to QE, where the central bank gets an asset in return, a direct transfer inflicts a direct loss on its balance sheet. Thus, the risks of balance sheet devaluation have to be weighted agains the beneficial positive effects on demand. As an example under basic model assumptions shows, a transfer could be refinanced by seigniorage alone already after 5 years.

If policymakers in the euro area wanted to achieve a boost to nominal GDP of ca. 1% (e100 billion), this would require a transfer of ca. €460 to every adult citizen (ca. 270 million) under the baseline assumption of an MPC of 0.8 (over four quarters) and a multiplier of 1, which is at the lower end of the spectrum of fiscal multiplier estimates at the ELB. [...] It would also amount to about 5x the Eurosystem’s average yearly seigniorage of ca. €25 billion, meaning that all else equal, the reduction in central bank equity resulting from the newly created liability could be replenished within five years with the current annual level of seigniorage alone.
Sascha Bützer (2022)

Another often discussed alternative to QE are monetary financed fiscal stimuli. However, there are certain legal (Maastricht treaty and SGP fiscal rules) and political obstacles (moral hazard arguments), especially in the case of a currency union. Concerning the democratic legitimation of such a powerful policy tool, Bützer stretched that OT should rule based (contingent on an inflation target), data-driven and carefully communicated. Moreover, redistribution policies should remain under democratic control, which would make OT preferable to QE, as it has smaller distributional effects. Altogether, OT could serve as a more effective and equitable alternative to QE, if conventional monetary policy becomes ineffective at the effective lower bound.

In her comments, Dorothea Schäfer (DIW Berlin) pushed back a little and stretched another crucial rationale for asset purchasing programs, namely financial stability. She challenged whether OT could have had the same calming effect on financial markets after the financial crisis or during the pandemic. Additionally, there are positive side effects of QE for the taxpayer, as refinancing costs of public deficits are lowered. Hence, direct transfers should not be a substitute for asset purchasing programs, but should rather be seen as a complementary policy tool.

In the discussion, the question came up, how OT would deal with asymmetric inflation dynamics across different member states of the Eurozone. Direct transfers would have a rebalancing effect similar to an automatic stabiliser. In countries close to potential the transfers would primarily translate into price effects, driving up inflation and have stronger real effects in countries with lower economic activity.

The old monetarist idea of helicopter money could steal the thunder of ECB critics, who are mostly concerned with asset price inflation and monetary financing of fiscal deficits. Nevertheless, with this policy instrument central banks would leave the beknown path of conventional or even unconventional monetary policy, which both have worked have worked indirectly through the financial sector. Read more on the topic helicopter money here.

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More than a decade after the financial crisis there still seems to be something seriously wrong with the financial system. Financial markets still tend to periodically misprice risk and contribute to boom and bust cycles. A better financial system needs to discourage short-termism and speculative activity, curtail systemic risk and distribute wealth more broadly.