Quantitative Easing vs Helicopter Money: A Comparative Analysis
The debate between quantitative easing (QE) and helicopter money has been a topic of considerable interest in both academic and policy circles. This article provides a detailed comparison of these two monetary policy tools, highlighting their advantages and limitations.
Understanding Central Bank Policy
Central banks, including the Federal Reserve in the US, implement monetary policy through a range of tools designed to influence economic conditions and achieve specific macroeconomic goals. Two of the most notable tools are quantitative easing and helicopter money. However, when it comes to their implementation, each tool has distinct characteristics and implications.
Quantitative Easing (QE): An Expanded Tool
Quantitative easing is an intervention that takes place after the traditional interest rate tool has been exhausted. It involves a central bank buying financial assets, such as government bonds, from banks, thus increasing the money supply and aiming to stimulate economic activity. Unlike traditional open-market operations, QE has a broader scope and can inject large amounts of liquidity into the financial system.
Advantages:
Enhanced Liquidity: QE provides liquidity to the financial system by purchasing assets, providing banks with funds to lend to businesses and consumers.
Stimulating Credit Growth: By lowering long-term interest rates, QE encourages lending and investment.
Addressing Low Inflation: QE can help drive consumer prices closer to target levels by stimulating demand in the economy.
Limitations:
Impact on Money Supply: QE does not necessarily increase the money supply for immediate spending. The purchased assets might be held on the central bank’s balance sheet or remain on the banks’ balance sheets.
Transmission Mechanisms: The effect of QE on economic outcomes is less direct, as it relies on business and consumer lending behavior.
Helicopter Money: A Different Approach
Helicopter money, a concept often attributed to economist Milton Friedman, involves a central bank directly providing cash or electronic funds to the public. This represents a far more direct distribution of money to individuals and households, bypassing financial intermediaries like banks.
Advantages:
Direct Impact on Consumption: Helicopter money is designed to boost consumption directly, as recipients are likely to spend the money quickly, helping to meet inflation targets.
Efficient Stimulus: The stimulus effect of helicopter money is more immediate and certain compared to the potential for increased lending that results from QE.
Avoiding Banks’ Lending Constraints: By avoiding the transmission through the banking system, helicopter money can bypass the constraints and uncertainties associated with bank lending.
Limitations:
Unconventional Nature: Helicopter money is considered unconventional monetary policy and has not been implemented by any central bank, making it a more radical policy tool.
Uncertainty: Policymakers may view helicopter money as beyond their mandate, leading to hesitation or resistance.
Implications for Policy Makers
The choice between QE and helicopter money often hinges on the political and economic context. In the eurozone, where the concept of QE for people was proposed, the decision to implement QE was viewed as a more conventional and pragmatic approach. However, from an economic perspective, helicopter money is argued to be more effective in boosting household demand.
Economic Case for Helicopter Money:
Evidence from Empirical Studies: Numerous studies indicate that direct transfers to households can significantly raise consumption and contribute to meeting inflation targets.
Direct Demand Stimulation: Helicopter money circumvents the uncertainty associated with bank lending and provides a more predictable stimulus effect.
However, the Radical Nature:
Political Acceptance: The radical nature of helicopter money may face resistance from conservative central bankers who prefer more conventional tools.
Risk of Inflation: While aimed at boosting consumption, helicopter money also carries the risk of unintended inflationary pressures.
Case Studies and Implementation Considerations
One might argue that tax rebate schemes implemented during the 2008 financial crisis in the US, which coincided with QE, were a form of helicopter money. However, this argument is disputed by purists who believe true helicopter money must be centrally designed and independently implemented without government involvement.
Conclusion
While both quantitative easing and helicopter money offer distinct advantages and limitations, the choice of policy tool ultimately depends on the specific economic conditions and the political context. From a purely economic standpoint, helicopter money may be more effective in directly boosting demand, but its unconventional nature and potential risks make it a less attractive option for conservative policymakers.