Thursday, August 18, 2016

Stephen Cecchetti and Kim Schoenholtz — A primer on helicopter money

Helicopter money is not just another version of unconventional monetary policy. Using simple central bank and government balance sheets, this column explains how helicopter money today is different from what Milton Friedman imagined back in 1969 – it is expansionary fiscal policy financed by central bank money.
Vox EU
A primer on helicopter money
Stephen Cecchetti, Professor of International Economics at the Brandeis International Business School, and Kim Schoenholtz, Professor of Management Practice, NYU Stern School of Business


Andrew said...

I'm missing something. With the helicopter money example, the money leaves the banking world through government spending or a credit to some private bank account. With QE, the money never leaves the banking system, right?

Tom Hickey said...

The way MMT accounts for it is that monetary policy simply changes the composition of non-government net financial assets without affecting the total. Fiscal policy changes the amount of non-governemtn net financial assets in aggregate. Spending and transfers add to nongovernment net financial assets and taxation subtracts from them.

QE, in which the cb buys government securities, changes the composition of $NGA but not the amount, so it is monetary. Genuine helicopter drops add to $NFA, therefore helicopter drops are fiscal even if performed operationally by the central bank.

HD are not a form of monetary policy as is generally believed, erroneously. C & S are pointing out how that works.

For the MMT view on money and banking see the recent series by Eric Tymoigne at New Economic Perspectives. Search on Tymoigne

Andrew said...

OK. I phrased it wrong in that QE could involve the non-bank private sector, but whether this is fiscal or monetary doesn't really seem to be the issue. Friedman saw EVERYTHING as monetary. What Friedman was saying (I think) is that if you increase the amount of money that's circulating, you would cause inflation. Of course this doesn't take supply/demand into account. But Friedman, I think, was still living in an era of general scarcity, both on the consumption side and production side. It also doesn't take inequality into account. But I don't think that the posting is any great criticism of Friedman just formally showing that a helicopter drop is a fiscal operation rather than monetary one.

Tom Hickey said...

The thing is that most folks in finance and economics have thought that helicopter drops are monetary because they are done by the cb. They also thought that QE was fiscal and would generate inflation. Wrong on both counts.

Friedman was wrong on several counts but his most egregious mistake was getting the causality reverse wrt the money multiplier. He thought it was an ex ante cause when it is actually an ex post accounting residual given the reserve requirement.