How Hel-e Drops Stimulate While Maintaining a Higher Interest Rate Than a Rate Targeting Regime

Helicopter drops of central bank e-money (hel-e’s) stimulate AD by increasing people’s monetary wealth therefore the interest rate doesn’t need to go down to stimulate. Under rate targeting it does need to go down to stimulate. Therefore under hel-e’s the rate will be comparatively higher for any given level of AD stimulus.

An increase in the money supply under hel-e’s will not affect interest rates in the same way as an interest rate targeting regime involving open market operations (OMO).

If 1 billion dollars is created and brought into circulation through bond purchases this will affect rates differently to 1 billion just placed into people’s central bank depository accounts. Under an OMO any bonds purchased by the CB adds to the total demand for bonds. This reduces rates more than if the CB did not purchase these bonds. Under an hel-e drop people will use some proportion of their money on bonds and the rest will be spent, therefore the demand for bonds will be lower and AD higher comparatively. Lower demand for bonds will put less downward pressure on rates while higher AD and inflation will place more upward pressure on the rate. Rates may actually go up under hel-e drops if the upward pressure from extra spending is greater than the downward force of extra loanable funds and bond demand by people.

Placing people’s money into accounts at the CB wont increase loanable funds until money leaves those accounts and goes to accounts controlled by commercial banks. Without emoney loanable funds do increase everytime money supply is expanded which places more downward pressure on rates compared to an arrangement where money is expanded into depository accounts at the central bank controlled by people. Hel-e’s generate increased spending and less loanable funds increases on a comparative basis.

Under a fixed interest rate system such as is employed by the ECB the rate doesnt need to be lowered to create greater stimulus if hel-e’s are implemented.

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