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Helicopter money – next
year's Christmas present?
Nordea Research, 12 December 2014
*** This article contains neither Nordea's view of
what the Riksbank ought to do, nor our forecast
on the Riksbank. It’s just some thoughts on
monetary policy ***
Imagine that the Swedish government transfers a generous
sum of money to each individual in the country. Let’s say
SEK 100,000 which corresponds to around 11,000 EUR.
With a population close to 10 million, this would add up to
about SEK 1,000bn or just over 25% of GDP. Government
debt would rise from the current 40% of GDP to 65% of GDP.
This is quite an increase, but government debt is still very low
in an international perspective.
The money transfer to households would boost both
consumer spending and savings. It would be a vitamin
injection that would lift employment and reduce
unemployment. As a positive side-effect, the stronger
demand would probably lead to higher wage growth and
inflation. The money transfer is also likely to weaken the
SEK and thus help lift inflation further. Moreover, the rising
demand and inflation would result in higher tax revenues,
and lower public expenditure, so that government debt in the
end would probably increase by considerably less than SEK
1,000bn.
The helicopter money would be financed by the government
issuing bonds that are bought by the Riksbank. As the
Riksbank buys the bonds, the increased supply of bonds
should not lead to higher interest rates. A helicopter money
transfer is similar to the conventional QE measures that
have been implemented in the US and Japan and are widely
expected in the Euro area in 2015, although the transfer to
households was not as direct in these countries.
A drawback of the above proposal is that households may
expect the money transfer to lead to future tax hikes, or
expenditure reductions, and consequently that their expected
life-time incomes will remain roughly the same. This may
nexus.nordea.com/research
Andreas Wallström
lead to increased savings rather than spending, that is, a socalled Ricardian equivalence effect.
Against this background, there may be reason to take the
proposal one step further. Why not let the Riksbank print
money and drop it over the country from helicopters?
A modern helicopter money drop
Helicopter money has its practical limitations. The cash may
land anywhere and it is hardly effective to let people go and
look for it. Instead, a modern helicopter money drop could be
in the form of a direct transfer to households' bank accounts.
The government and the Riksbank would have to agree on
writing off the increased debt immediately. This will imply that
the helicopter money is fully financed via the printing press.
At first glance this idea may seem unrealistic or even insane.
It is admittedly experimental and prudence is often wise in
economic policy making. But the idea of helicopter money is
supported by economic theory. The helicopter metaphor was
first used by Milton Friedman (1948) but others, for example
Keynes, had similar thoughts even earlier. It is said to be the
only issue that Friedman and Keynes agreed on.
And it also has its advocates in modern times. Former Fed
Chairman Ben Bernanke recommended it for Japan, which
also went through with it in practice (1). You could also argue
that the recent measures in the US in hindsight will turn
out to be overt money-press financing. There is also an
academic discussion about helicopter money as a relevant
monetary policy tool. (2)
Advantages of helicopter money versus conventional
monetary policy measures
Compared with the monetary policy measures currently being
discussed in Sweden, for example a negative repo rate or
QE, helicopter money may be preferable. The reason is that
the current low-rate environment, which may be reinforced
by for example conventional QE, may jeopardise financial
stability. The low interest rates intensify the hunt for yield,
driving up asset prices and potentially posing a risk to the
Swedish housing market.
Helicopter money, however, could be combined with a higher
policy rate or at least a signal that the policy rate will soon
nexus.nordea.com/research
be hiked. In this way, the ongoing housing market race could
be slowed down. This could also prevent excessive SEK
weakening, which could risk eroding the purchasing power of
households and businesses.
Giving every household a lump sum would also have a
more direct effect on demand and inflation than alternative
monetary policy measures. It would also directly benefit
households that are not indebted. Many such households
probably also have a high propensity to consume. The
direct effect of recent years' monetary policy has benefited
borrowers, adversely affected lenders and had no direct
effect at all for many households.
At the same time, the obvious question is whether the
Swedish economy needs further stimulus? Well, economists
generally agree that there are idle resources and that
inflation is too low. Helicopter money would undoubtedly
boost both demand and inflation. Why be stingy with the
ammunition? If more is needed, we can do it again!
Meanwhile, the anchor for economic policy, that is, the
inflation target and fiscal policy framework, should remain
in place, so that we do not create uncertainty about the
performance of the the Swedish economy and public
finances longer out. Helicopter money is a temporary fix we promise! Let us also promise not to buy homes for the
money. International observers are very concerned about the
situation in the Swedish housing market. (3)
A reasonable objection to the proposal is that the money
would do more good elsewhere. Would it not be more
appropriate to instead allocate the money to infrastructure?
Possibly, but it is not entirely clear. The possibilities of
carrying out large public-sector infrastructure improvements
over a short period are limited and may be ineffective.
Therefore, a direct transfer to households may very well be a
more efficient use of resources.
So maybe we have not yet reached the end of the road in
terms of fiscal and monetary policy measures? There are
admittedly circumstances that prevent a helicopter money
drop from being carried out in the near future. For example,
it is not allowed under the Sveriges Riksbank Act. And given
the current political turbulence, a review of the Riksbank
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legislation is not high on the government's agenda. But
who knows, maybe helicopter money could be next year's
Christmas present? In light of recent years' monetary policy
swings it would be foolish to rule anything out.
-----------------------------------------------------------------------------Footnotes:
(1) Japan has in practice made a "helicopter money drop" by
guaranteeing that bought government bonds will not be sold.
(2) Among the advocates are Adair Turner, former head
of the UK's FSA and now professor at the Cass Business
School, and Willem Buiter, lecturer of economics at the
London School of Economics.
(3) The EU Commission seems to consider Swedish
households' indebtedness as a threat to all of Europe: http://
www.dn.se/ekonomi/svenska-hushallens-lan-kommergranskas-i-eu/ (in Swedish)
Want to know more about helicopter money? Here are some
useful links:
Bernanke (2003) Some Thoughts on Monetary Policy in
Japan (Fed Speech)
Buiter (2014). The Simple Analytics of Helicopter Money:
Why It Works — Always. Economics: The Open-Access,
Open-Assessment E-Journal, 8 (2014-28): 1—51. http://
dx.doi.org/10.5018/economics-ejournal.ja.2014-28
Reichlin et al (2013) Helicopter money as a policy option,
http://www.voxeu.org/article/helicopter-money-policy-option
Matthews (2014) To fix the economy, let's print money and
mail it to everyone
Turner (2013) Debt, Money and Mephistopheles: How do we
get out of this mess?
nexus.nordea.com/research
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