Two basic central bank reforms to increase monetary policy effectiveness, equality and increase stability:
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 principle new tool is the e-money helicopter drop (hel-e 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 to the public should be periodically adjusted by the central bank in order to attain its targets. Expansionary policy would entail increasing the rate of helicopter drops and a contractionary policy would involve slowing the rate of money growth. Under extreme circumstances the central bank may stop hel-e’s or even issue securities to contract the money supply. New legislation would need to be crafted to allow central banks to perform e-hel-e’s including strict limitations on how they are performed.
Principle benefits of proposal
Hel-e’s don’t require lowering rates or asset purchases so therefore won’t stimulate financial activities such as credit, asset trading and speculation to the same extent as rate targeting and QE. Excessive credit and asset trading grow the financial sector drawing resources away from rest of economy adversely affecting real GDP growth in long term. Less speculation will result in more stable business cycles generating greater capital investment.
Hel-e’s can generate the same rate of AD growth or unemployment as conventional tools while generating less credit stimulus due to the higher interest rate.
Credit intermediation between savers and investors wont be adversely affected due to a higher rate if central bank is meeting its targets. Higher long term real growth due to a smaller financial sector will improve the intermediation process because of greater real incomes. Higher real GDP is also an incentive to invest more and speculate less because investment is more profitable on a comparative basis.
Hel-e’s don’t depend on bank intermediation so problems within banking system will not affect operation of policy.
No zero lower bound.
Hel-e’s don’t depend on fiscal arm of government to operate. Therefore difficulties of negotiating with political system are avoided. The central bank has no budget constraint unlike fiscal arm therefore people wont hold onto money in anticipation of higher future taxes. Potential undermining of central bank independence is avoided if helicopter drops are performed independently by the central bank.
The central bank has economies of scale in providing deposits/payments and efficiencies will also be found in clearing by central bank provision. The monetary authority is not profit oriented so should provide superior service to depositors. Payments and depository system is highly systemic therefore the central bank should provide these.
If people participate directly with central bank greater confidence in this institution will prevail and people will also become more educated in economic matters.
CB issued e-money also has other benefits over privately issued money due to CB economies of scale and because the CB will operate in interest of public while private banks tend to operate to maximize shareholder profits.
Studies of tax rebates which occurred in 2001 and 2008 in the US and Australia show that helicopter drops are effective in generating stimulus. 20 to 40 % of the money received in the tax rebate of 2001 was spent in the quarter when the money was received and approximately another third in the following quarter Johnson et al. (2006). Only non-durable spending was included in this study.
12-30% of the 2008 tax rebate was spent on nondurable goods within three months of payment receipt, and a significant amount more on durable goods resulting in 50-90% of the payments spent (Parker et al. (2013). In an Australian study of it’s 2009 tax rebate around 40% was spent in the quarter of receipt according to Leigh (2012).
Ehel-e’s should be more effective than helicopter drops involving monetary and fiscal cooperation due to the fact that the central bank has no budget constraint and therefore people wont hold onto money in anticipation of greater future taxes.
Less financialisation means more equality because the wealthiest benefit disproportionately from financialization. Stimulating through higher monetary wealth of all people evenly has a more equal distribution than asset purchases because asset ownership is concentrated.
The payment and depository system provided by the central bank will be risk free due to e-money provision by central bank.
If people hold most or a significant proportion of their demand deposits at the central bank the current liabilities of commercial banks will be lower and hence banks will be less susceptible to bank runs.
Private banks can create money in the form of deposits but unless they pay interest (may require a law change) people will shift money away into risk free central bank accounts which will drain banks of assets. Therefore private bank created money will generally need to pay interest and this added cost to issuers will regulate the amount of issuance.
Banks with excessive risk portfolios will be forced to pay higher deposit interest by the markets and this will curtail excessive borrowing. Short term/speculative activity will self regulate to a greater extent because as banks issue loans and hence deposits they face immediate increases in their costs.
If the banking system collectively becomes too speculative people can place their funds in central bank emoney deposit accounts and therefore pull money out of the banking system altogether which will limit excessive speculation. Without emoney this is not possible.
As a result of a smaller financial sector and less speculation business cycles are more stable reducing systemic risk.