The E-money Helicopter (Hel-e) Drop

The E-money Helicopter (Hel-e) Drop

Two basic central bank reforms to increase monetary policy effectiveness, equality and 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 hel-e’s including strict limitations on how they are performed.

Principle benefits of proposal:

Hele-s will more effectively stimulate aggregate demand and inflation than current policy tools without stimulating excessive credit and instability.

Effectiveness

Hel-e drops are a more effective tool for achieving central bank targets. Unlike interest rate targeting a lack of demand for credit or high unemployment should not diminish the effectiveness of hel-e drops in generating AD. High unemployment actually makes hel-e drops more effective in generating spending because liquidity preference of unemployed people is very low. 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). The tax rebate in Australia in 2009 resulted in 40% spent in the quarter of receipt (Leigh, 2012).

No zero lower bound on hel-e’s.

As a result of the central bank more effectively being able to achieve its targets investment will increase because investment depends on stability and economic growth. As a result of higher and more stable growth speculative activities should decline because on a comparative basis investment is more attractive.

Hel-e’s will maintain a higher interest rate than an interest rate targeting regime for any level of stimulus generated because hel-e’s stimulate through increased monetary wealth, not a lower interest rate. In any specific economic environment a higher rate will stimulate credit and financial sector growth less than a lower interest rate. As a result of employing hel-e drops as a policy tool, credit creation and financialization will be increased less than under a rate targeting regime. Less credit will grow the financial sector less and draw less resources away from rest of economy, increasing real GDP growth. Lower credit growth will also improve stability because excessive credit contributes to the generation of bubbles.

Hel-e’s don’t stimulate through higher asset prices and portfolio rebalancing like quantitative easing (QE). Hel-e’s stimulate through higher monetary wealth. Increasing people’s money at central bank depository accounts increases the demand for financial activities such as asset trading and credit creation less than asset purchases by the central bank. Excessive portfolio rebalancing stimulates the financial sector too much because asset trading and creation are activities it underpins which generates excessive growth in this sector, undermining real GDP.

Increasing asset prices as a result of greater central bank demand for assets and portfolio rebalancing instead of greater profitability and intrinsic value of these assets contributes to the generation of bubbles and instability. Higher asset prices and portfolio rebalancing will occur under hel-e’s as a result of increased profitability from higher real GDP or increases in intrinsic value of entities, not as a result of increased demand for financial assets due to central bank asset purchases. The financial sector will grow if it underpins productive activities, not because of greater central bank demand for assets.

Hel-e’s will positively affect credit intermediation. They will increase credit to the most productive areas due to higher real GDP and creditworthiness while limiting credit to areas which are less productive due to higher interest rates. Central bank e-money will increase bank funding costs because banks will have to pay interest on deposits which will reduce non-productive forms credit creation. Credit and financial sector growth to support productive activities will grow while credit and financial sector growth to support non productive activities will decline.

Higher real GDP growth as a result of hel-e’s will incentivize investment more and speculation less because investment will be more profitable on a comparative basis to non-productive activities. This will help to prevent the formation of asset bubbles.

Less bubbles will result in more stability which in turn should generate greater investment (Guiso and Parigi, 1999).

Hel-e’s don’t depend on bank intermediation so problems within banking system will not affect the operation of policy.

Hel-e drops are superior to helicopter drops requiring fiscal and monetary cooperation

The central bank has no budget constraint. Therefore potential limitations experienced by fiscal arm of government are avoided.

Hel-e’s don’t depend on fiscal arm of government to operate. Therefore difficulties of negotiating with political system are avoided. Central bank independence isn’t compromised if it can perform hel-e’s independently.

Expansions of money by central bank don’t enter commercial banking system at creation therefore placing less downward pressure on rates than conventional helicopter drops.

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.

Equality

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.

Greater stability

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 e-money deposit accounts and therefore pull money out of the banking system altogether which will limit excessive speculation. Without central bank e-money it is not possible to deposit money electronically outside of the commercial banking system.

As a result of a smaller financial sector and less speculation business cycles are more stable reducing risk.

References

Johnson, D S, J A Parker, and N S Souleles (2006), “Household Expenditure and the Income Tax Rebates of 2001”, American Economic Review 96: 1589-1610.

Leigh, A (2012), “How Much Did the 2009 Australian Fiscal Stimulus Boost Demand? Evidence from Household-Reported Spending Effects”, B.E. Journal of Macroeconomics 12(1).

Luigi Guiso and Giuseppe Parigi (1999), “Investment and Demand Uncertainty”
,  The Quarterly Journal of Economics, Vol. 114, No. 1 (Feb., 1999), pp. 185-227.

Parker, J A, N S Souleles, D S Johnson, R McClelland (2011), “Consumer Spending and the Economic Stimulus Payments of 2008”, NBER Working Paper 16684, January.In any specific economic environment a higher rate will stimulate credit and financial sector growth less than a lower interest rate.

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