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. The key tool is the e-money helicopter drop. When the monetary authority is pursuing expansionary monetary policy in order to attain its goals related to unemployment, GDP growth or inflation it can periodically expand 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 it may also conduct temporary open market operations or issue securities 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
E-helis stimulate spending through higher monetary wealth of e-heli recipients. As a result of higher monetary asset wealth from heli’s lending will also be stimulated due to improved creditworthiness as well as an increase in loanable funds. Heli’s are superior to current interest rate targeting tools because they generate spending stimulus independently of the credit channel while simultaneously stimulating credit. Therefore dysfunctional credit markets or banking systems should not affect the operation of monetary policy.
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. This would simplify the process of performing heli-drops and remove any conflicts of interest that may arise from undermining central bank independence.
Heli’s stimulate investment by increasing spending and hence income. Higher AD will stimulate investment as entities compete for income. Heli’s avoid increasing speculation through excessively stimulating credit into an environment of low growth in which investment is not appealing due to low demand.
If e-money is accounted for as a type of equity and not a liability on the balance sheet at creation issues of central bank solvency are less of a concern and wont require additional government borrowing or taxation in future due to budget constraint. 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 branch so money currently has no real backing. Ultimately the true backing of fiat money is effective and accountable management of the monetary system leading to a strong economy.
There is no zero bound problem to address under heli’s.
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. This is especially true of the unemployed and people with low incomes and little to no wealth. 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.
Greater systemic safety and efficiency 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. The central bank can offer depository services for the public interest. Commercial banks are profit oriented which can compromise the level of service provided to depositors.
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.