Tuesday, April 19, 2016

We are all helicopter pilots now

In Ben Bernanke's famous 2002 helicopter speech, he made the point that the Fed has numerous tools to fight deflation, even if interest rates was at the zero bound:
The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
He went on to say that the coordination of fiscal and monetary policy amounted to a helicopter drop of money:
Each of the policy options I have discussed so far involves the Fed's acting on its own...A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.
In his latest blog post, Bernanke expanded on that point. Monetary policy has limits by itself. Helicopter money is fiscal + monetary policy:
In more prosaic and realistic terms, a “helicopter drop” of money is an expansionary fiscal policy—an increase in public spending or a tax cut—financed by a permanent increase in the money stock. To get away from the fanciful imagery, for the rest of this post I will call such a policy a Money-Financed Fiscal Program, or MFFP.
He concluded that helicopter money is not necessary in the US, but they may be useful tools in other parts of the world:
Money-financed fiscal programs (MFFPs), known colloquially as helicopter drops, are very unlikely to be needed in the United States in the foreseeable future. They also present a number of practical challenges of implementation, including integrating them into operational monetary frameworks and assuring appropriate governance and coordination between the legislature and the central bank. However, under certain extreme circumstances—sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies—such programs may be the best available alternative. It would be premature to rule them out.
Consider the Bernanke helicopter money prescription. The government spends by borrowing and the central finances the spending by buying up the debt and printing money. It sounds positively Japanese. Abenomics, anyone?

The full post is available at our new site here.

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