The author provides a rigorous analysis of Milton Friedman's parable of the 'helicopter' drop of money – a permanent/irreversible increase in the nominal stock of fiat base money rate which respects the intertemporal budget constraint of the consolidated Central Bank and Treasury – the State. Examples are a temporary fiscal stimulus funded permanently through an increase in the stock of base money and permanent QE – an irreversible, monetized open market purchase by the Central Bank of non-monetary sovereign – debt. Three conditions must be satisfied for helicopter money always to boost aggregate demand. First, there must be benefits from holding fiat base money other than its pecuniary rate of return. Second, fiat base money is irredeemable – viewed as an asset by the holder but not as a liability by the issuer. Third, the price of money is positive. Given these three conditions, there always exists – even in a permanent liquidity trap – a combined monetary and fiscal policy action that boosts private demand – in principle without limit. Deflation, 'lowflation' and secular stagnation are therefore unnecessary. They are policy choices.
Economics — The Open Access Open Assessment E-Journal
Willem H. Buiter | Chief Economist. Citigroup
(h/t Brad DeLong)
3 comments:
It would be interesting to have Scott Fullwiler commenting on this paper, since Buiter appears to get to the same conclusions as those to be seen on Fullwiler´s concise and famous (within MMT circles) helicopter drops text - while cloaking them under many more equations and utility functions.
Buiter says he was prodded into writing this paper by Larry Summers. This is important - Summers is still very influential and a word on his part in support of monetary financing of the deficit would be very much welcome.
Summers knows about MMT and likely has read Scott's paper.
True enough overall but Second, fiat base money is irredeemable – viewed as an asset by the holder but not as a liability by the issuer. This piece of nonsense should not be overlooked. Of course, fiat base money is redeemable, and whether or not crazy people "view" it as a liability, it is a liability of the issuer.
True, a lot of words and equations to say something perfectly obvious to, and provable by, a 10 year old. But there is no meaningful difference between monetary "financing" (not) of deficits, and the way we do it now. The important thing is how big the deficit is and how the spending is directed, not how we pretend to "finance" it. Sorry to harp on it, but STF agreed with me a while back that that was a/the main misimpression that MMT fans can have - that we don't have an MMT system already.
Summers knows about MMT and likely has read Scott's paper. I doubt it, even if his eyeballs have rested above the paper, which I even doubt, though less.
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