Two basic central bank reforms to increase monetary policy effectiveness, equality and reduce systemic risk:
1. Extend the provision of electronic deposit accounts or e-money by the central bank (CB) to all people and other entities instead of only depository or financial institutions. The CB is tasked with providing the supply of money and should therefore also provide an efficient electronic means of making payments and depositing the money it creates. Physical notes, coins and commercial bank deposits or other forms of broader money will continue to exist in their current form.
2. Incorporate new policy tools so the monetary authority can attain its targets more effectively and equitably. When the monetary authority is pursuing expansionary monetary policy in order to attain its goals related to unemployment, GDP growth or inflation it can affect the target interest rate (if interest rate targeting) by periodically expanding the supply of central bank e-money directly and evenly into all citizen’s accounts through helicopter drops. Other policy tools such as the ones currently employed may also utilized when optimal. The rate of monetary growth through helicopter drops to the public should be periodically adjusted by the central bank in order to attain its targets while temporary open market operations or securities issuance may be employed in order to fine tune the short term interest rate or contract the monetary base. E-money heli-drops would represent a more effective version of helicopter drops because central bank independence is not compromised. New legislation would need to be crafted to allow central banks to perform e-heli’s including strict limitations on how e-heli’s are performed.
Principle benefits of proposal
The various stimulatory or contractionary effects as a result of adjustments in the money supply and hence interest rates will continue under helicopter drops with the addition of new direct mechanisms of action through increased public nominal monetary wealth. E-helis will nominally increase monetary wealth of recipients by the amount of newly created money. Under asset purchases or lending the newly created money received by the central bank counter-party does not result in an increase in wealth because it is offset by a new liability or the loss of an asset. Portfolio re-balancing may induce a wealth effect under tools such as quantitative easing, but helis have the added benefit increasing monetary wealth while also inducing the re-balancing effect.
Helicopter drops of central bank issued e-money allow the central bank to conduct helicopter drops in order to stimulate the economy without requiring the cooperation of the fiscal arm of the government.
If e-money is accounted for as a type of equity and not a liability on the balance sheet at creation issues of solvency central bank are less of a concern. Issuance of money by a government entity to its constituent is most accurately accounted for as equity. This is somewhat similar to a corporation issuing stock to existing shareholders. If e-money is recognized as equity the central bank can issue the quantity of money required to achieve targets without needing to purchase assets. Under current system the central bank buys assets such as bonds which are claims on the money it creates issued by another government agency so money currently has no real backing. Ultimately the true backing of money is effective and transparent management of the monetary system leading to a strong economic system.
In a climate where the short term interest rate is at the zero lower bound (ZLB) the current central bank counter-parties have very little or no opportunity cost when holding reserves due to low investment returns and therefore expansions of central bank money should have a reduced impact on growth and inflation. The overall public on average have a higher opportunity cost when holding money compared to central bank counter-parties due to foregone utility from consumption or other spending. Financial entities such as the current central bank counter-parties are oriented towards realizing profits from investing and inter-mediating whereas people gain greater utility from consuming. Therefore expansions of funds to public would more effectively create growth at the ZLB.
The wealth effect as a result of portfolio re-balancing will continue to manifest as it does at present but an additional wider reaching increase in wealth will also prevail under e-helis through increased money balances of central bank counter-parties. Asset holdings are concentrated with the wealthier people owning a large proportion of assets and many people owning few or no assets. Therefore under the present system increases in wealth from increased asset prices don’t reach large parts of the population which diminishes the effectiveness of monetary policy. Wealthier people’s propensity to spend out of income is lower than the average person therefore monetary policy induced increases in wealth of all people through money issuance should result in greater spending increases when compared to wealth increases skewed towards wealthier people.
Under the present system central bank actions designed to create a wealth effect throughout the economy are not guaranteed to succeed if asset markets don’t appreciate in response to expansionary monetary policy. e-helis will increase people’s monetary wealth even if asset prices don’t change.
Increased public wealth in form of liquid assets such as money is more likely to be used for spending than an increase in wealth in form of less liquid assets such as stocks or housing. Increase in wealth from less liquid assets should lead to a smaller increase in spending due to taxation from capital gains, transaction costs and effort of converting non liquid wealth into money in order to spend.
The money supply to the broader economy could increase without necessitating an increase in debt if the central bank expands the monetary base directly to people. Under the current system expansions of broader money generally require more borrowing because commercial banks usually increase the quantity of deposits through lending. If the money supply can increase while maintaining lower debt to GDP levels greater financial stability should prevail. Monetary policy effectiveness will not be compromised in an instance of a credit crunch or other forms of dis-intermediation if the central bank can directly interact with economy more broadly.
Greater systemic safety and efficient through economies of scale of the deposits and payments system will be realized if people can also directly deposit and transact in central bank e-money which is risk free electronically alongside commercial bank deposits.
A system whereby the general public directly interact with the central bank will instill greater levels of confidence in the central bank. People should also become more educated in monetary issues if they directly interact with the central bank.