The very sharp Nick Rowe is distressed and depressed:
Nick Rowe: "This article on helicopter money is such a mare's nest...
...I don't know where to begin to untangle the mess. https://t.co/C0sqyNSjM3
- Nick Rowe (@MacRoweNick) May 25, 2016
I agree with Rowe: Borio, Disyatat, and Zabal seem to me to be confused.
They seem to be saying that in the long run a permanent increase in the nominal non-interest-bearing monetary base must be "financed" by one of:
raising reserve requirements - thus imposing financial repression and levying an implicit tax on the banking sector.
transforming the monetary base at the margin into interest-bearing debt.
keeping the policy interest rate at zero permanently, so that there is perfect substitutability between interest-bearing government debt and the non-interest-bearing monetary base.
My first reaction is that they have missed:
(4) a higher future price level so that the nominal non-interest-bearing monetary base is not an increase in the real non-interest-bearing monetary base.
And my second reaction is that their conclusion is simply not right. Their conclusion is that helicopter money
is equivalent to either debt or to tax-financed government deficits, in which case it would not yield the desired additional expansionary effects...
And thus, at least in a world of Ricardian equivalence where interest rates will not permanently remain at the zero lower bound, helicopter money is completely impotent.
If the price level were truly independent of money issuance, then the monetary authority could use the money they create to acquire indefinite quantities of goods and assets. This is manifestly impossible in equilibrium. Therefore money issuance must ultimately raise the price level, even if nominal interest rates are bounded at zero. This is an elementary argument, but, as we shall see it is quite corrosive of claims of monetary impotence...
The ECB's problem right now is that it simply cannot meet its inflation target using its standard policy tools. Helicopter money would enable the ECB to meet its inflation target - and in that lies its additional power to stimulate production and employment.
Claudio Borio, Piti Disyatat, and Anna Zaba: Helicopter money: The illusion of a free lunch: "Beware of central banks bearing gifts...
...Helicopter money, as typically envisioned, comes with a heavy price: it means giving up on monetary policy forever. Once the models are complemented with a realistic interest-rate setting mechanism, a money-financed fiscal programme becomes more expansionary than a debt-financed programme only if the central banks credibly commits to setting policy at zero once and for all. Short of this, these models would suggest a rather limited additional expansionary impact of monetary financing. If something looks too good to be true, it is. There is no such thing as a free lunch.