Sunday, February 24, 2013

Stephen Grenville — Helicopter money

What would the overt monetary financing of fiscal deficits involve? This column explains the differences between “printing money”, quantitative easing, and overt monetary finance. Lord Turner’s proposed “helicopter drop” raises issues for banks’ balance sheets and central bank independence.
Helicopter money
Stephen Grenville | Visiting Fellow, Lowy Institute for International Policy


Ramanan said...
This comment has been removed by the author.
Ramanan said...

Although the author/article seems to understand the issues better than most, I think it somehow misses on some fine points.

i.e., it implicitly assumes that to expand fiscal policy, the government may highly likely need the help of the central bank in addition to the usual fiscal agent role.

Which isn't the case as the government can easily decide to increase expenditures.

But nice overall especially:

"The amount of currency held by the public is determined by demand."

Tom Hickey said...

Yes, I think we are seeing an advance lately. Don't know whether they just realized this, or the present situation has them running scared enough to begin getting real.

Ralph Musgrave said...


You criticise the author/article for saying that when government does some fiscal boost, it needs help from the central bank. Strikes me the author is correct in that when government borrows and spends (i.e. does fiscal boost) the latter borrowing is likely to raise interest rates, which involves so called “crowding out” (i.e. private borrowing and investment are hindered by government “borrow and spend”). And only the central bank can stop the latter rise in interest rates.

However the EXACT EXTENT of crowding out is in dispute. And that in turn is a good argument for a Turner type merge of monetary and fiscal policy (actually advocated a very long time ago by both Keynes and Milton Friedman). That is, there MIGHT BE significant crowding out under conventional fiscal boost, whereas there can’t possibly be any under a Turner type policy. So why don’t we go for the latter?

Ramanan said...


I generally tend to avoid any description using the phrase crowd-out. It brings in mind monetary scarcity which hardly exists in this world. The world is just a game.

So if the government increases expenditure, it brings in more wealth to the private sector who will allocate the same fraction of their wealth in bonds.

Of course that is not to say that interest rates will remain unchanged but bonds may sell off in a healthy way. This is to allocate wealth into riskier assets such as corporate bonds and equities - which will be helpful to firms.

Of course, as the government spends and increases demand and output (and this happens quickly), firms will see higher sales and hence their bond spreads may tighten.

If 10-year govt bond yields rise from 2.0% (US) to 2.5% or even 3.5% - what is the cause of worry?

Also, an increase in activity will lead firms to invest more and the rate of interest is just one not-so-great element going into an entrepreneur's mind. Together the increase in G and I will have a great multiplier effect on output.

Andrew said...

Still banging on about crowding out and Ricardian equivalence....when will they grow weary of such horseshit.

JKH said...

2 things:

a) Every time you see the word "helicopter" in an article on monetary economics, think "drivel"

b) Immediately put up a detour sign, and point the reader to the Fullwiler article

It's just quicker that way.

Dan Kervick said...

Grenville does disparage the concept of helicopter money as a central bank operation, and points out a true helicopter drop or "cash splash" would be a fiscal operation.

I feel like he misses one option. Yes, the central bank could purchase government bonds directly to fund deficits. As he points out, the effect is significant but minimal. But it could also be authorized to simply credit the treasury directly, which means there is no offsetting liability from the treasury to the central bank for bond principle.

Ramanan said...

Dan K,

Always remember financial assets = financial liabilities.

When the central bank provides advances to the government, its assets and liabilities increase and so does the government's.

The only difference between the advances and bonds is that the latter is marketable.