Helicopters to the Rescue?

“Helicopter Money Is Here!” Forbes, March 17, 2020.
“Helicopter money: The time is now,” VoxEU.org, March 17, 2020.“
”The Helicopters Are Coming,” Project Syndicate, March 26, 2020.
“We Need to Start Tossing Money Out of Helicopters” The Atlantic, March 31, 2020.
“U.S. needs more ‘helicopter money’ to cushion coronavirus impact.”  CNBC, April 9, 2020.

Is helicopter money here? Do we need it now? Is it coming?

The short answer to these questions is that it is not here and we currently do not need it, but should the economic disaster brought on by COVID-19 continue for much longer, that might change.

To be clear, the relief checks that governments are sending out to households and businesses are not helicopter money. Despite their enormous scale, the financing of these transfers is no different in character from that of traditional government benefits, including public pensions, unemployment insurance, payments to farmers, provision of health care, and the like. Governments are collecting taxes and issuing debt to the public. Absent a burst of inflation, repaying these debts will require some combination of future tax hikes and spending cuts.

Helicopter money is when the central bank finances government expenditure directly. In these circumstances, the fiscal authority, through its debt management policies, controls the size of the central bank’s balance sheet. This is monetary finance arising from fiscal dominance: to increase seignorage, the fiscal authority usurps the role of the independent central bank in determining the size of base money (currency plus reserves held by banks at the central bank).

Put differently, fiscal policy need not be helicopter money. However, helicopter money is always fiscal policy. Indeed, as we describe in our primer, helicopter money is not monetary policy. If the Fed were to drop $100 bills out of helicopters, it would be doing the Treasury’s bidding.

Should monetary policymakers consider surrendering their independence in this way? In our view, a far better alternative is to peg the long-term interest rate at zero. Currently in use by the Bank of Japan, this policy of yield curve control allows central banks to retain a small, but significant degree of monetary control. It also captures the features of U.S. monetary policy from 1937 to 1951, when the Fed capped the long-term bond yield to support U.S. wartime finance (see here).

Before getting to that, we turn to a brief explanation of helicopter money. The mechanics are straightforward. First, the fiscal authority issues a bond directly to the central bank (rather than to the public) in exchange for a credit to its deposit account. Next, the fiscal agent distributes the funds either by purchasing a good or service, or by transferring the money directly to an individual or firm. The recipient deposits the funds in their bank, which shifts the liability on the central bank’s balance sheet from the government’s account to the reserve account of the commercial bank. (In our primer, we show how this all works using a set of balance sheets.)

How does helicopter money compare with the central bank’s large-scale purchases of government bonds? In the now familiar case of quantitative easing (QE), the monetary authority expands its balance sheet by buying a bond in the open market, crediting the reserve account of the seller’s commercial bank. At first glance, the impact on the central bank’s balance sheet of a QE operation mirrors that of an equivalently sized helicopter money drop cum government transfer: both result in an equal increase in government bond assets and commercial bank reserve liabilities.

There is, however, a critical difference between these two policies. With helicopter money, the central bank receives bonds directly from the government, having been obliged to purchase them in the primary market at the behest of the fiscal authority. Furthermore, the government determines the scale of the helicopter money drop, not the central bank. By contrast, in the case of quantitative easing, the central bank determines the quantity of assets to acquire and buys them in the secondary market. In doing so, it maintains control over the size of its balance sheet. The latter is the act of an independent central bank; the former is not.

Over the past decade, central bank balance sheets have ballooned. In the following chart, we show the evolution of central bank assets in four jurisdictions: the United States, the euro area, Japan and Switzerland—all as a fraction of nominal GDP. The black portion shows the size at the end of 2007, prior to the crisis-driven surge of balance sheets. The Federal Reserve’s balance sheet was less than 6% of U.S. GDP. By contrast, the Bank of Japan already held assets equal to 52% of Japanese GDP, reflecting at least a decade of QE. The Eurosystem and the Swiss National Bank were somewhere in between.

Central Bank Assets (Percent of GDP), end-2007 to March/April 2020

Note: Numbers above bars are the current ratios.
Sources: FRED and Swiss National Bank.

From 2007 to 2019, as shown in red, all of these balance sheets grew dramatically: the Fed’s by 13% of GDP; the Eurosystem by 25%; the BoJ by over 50%; and, in an effort to keep their exchange rate from appreciating, the Swiss National Bank’s (SNB) assets rose by an almost unimaginable 100% of domestic GDP. Over the past four months, with the exception of the SNB, central banks have resumed rapid accumulation of assets―this is the gray portion of each bar.

Is any of this helicopter money? Have any of these central banks engaged in monetary finance? As a technical matter, the simple answer is no. The Swiss case is the easiest. Over the 2007 to 2019 period, SNB holdings of Swiss government debt declined from 30% to 18% of GDP, so the entirety of the SNB’s purchases was foreign assets. For the other three central banks, the purchases were in the secondary market. In both the euro area and the United States, the central bankers decided when and how much to buy. That is, they retained monetary control.

The Japanese case is a bit more complex. Beginning in 2016, through its policy of yield curve control, the BoJ has targeted both the short- and long-term interest rate at zero. This means that the central bank is the residual buyer of Japanese government bonds (JGBs) in the secondary market. As a result, the size of the BoJ’s balance sheet depends on a combination of the Japanese Government’s debt management decisions and the willingness of private investors to hold JGBs at a zero nominal interest rate. So long as the private sector is comfortable holding the outstanding quantity of JGBs at the committed interest rate, the BoJ determines the size of its balance sheet. Beyond that, however, additional government issuance lands on the BoJ’s balance sheet through its secondary market operations. Importantly, the BoJ makes this commitment and accepts this role in order to secure its objective of price stability.

Yield curve control is perilously close to monetary finance, and it has the flavor of helicopter money. Not surprisingly, a consequence of this policy is that the BoJ’s balance sheet now exceeds 100% of Japanese GDP. Moreover, hints of an exit from targeting the long-term yield can be a source of financial disruption as shifting private attitudes toward bond holdings fuel potentially immense swings in the central bank’s balance sheet. At the same time, so long as yield curve control remains consistent with the BoJ’s commitment to price stability, it seems far less likely than helicopter money to trigger a future inflation burst.

The challenge would be for the BoJ to exit from yield curve control once inflation reaches the central bank’s target. Based on the experience of the past 25 years, this would be welcome.

What should the Fed and the ECB do now? As we have argued on several occasions, there is clear justification for central banks being on a wartime footing (see here, here and here). They should be using every tool at their disposal to support their government’s battle against the coronavirus, ensuring the financial system continues to perform its critical functions. Furthermore, central banks should be prepared to help limit the cost of the government’s battle against COVID-19. While helicopter money does this, yield curve control accomplishes the same thing without the central bank necessarily relinquishing balance sheet control. Most important, yield curve control also allows the central bank to reverse course if its primary goals of price and economic stability are threatened.

Over the past three and one-half years, the BoJ has kept the 10-year JGB yield close to zero without any serious damage to the Japanese economy or financial system. This is something that the Fed and ECB should seriously consider. (As far as we know, since it does not involve direct monetary finance, yield curve control would not face any of helicopter money’s potential legal impediments.)

Fed Governor Brainard already has made the case for yield curve caps at the short- to medium-term maturity range. The longer the COVID-19-driven economic devastation persists, the stronger the case for extending yield curve control to long maturities—as the Fed did during World War II. (We note that Governor Brainard’s sophisticated proposal cleverly avoids some of the pitfalls inherent in a naïve implementation of such a policy.)

In the United States, the Fed faces enormous difficulties going forward. With its myriad of programs aimed at lending to all parts of the nonfinancial sector―municipal governments, corporate bond issuers, and medium-sized firms―it is rapidly becoming a state bank. We have argued that it will be far more difficult in the future to rid itself of such politically sensitive assets than it would be to diminish holdings of Treasury securities (see here). Consequently, it will be more difficult to restore central bank independence when the time for doing so comes.

In the current environment, it makes sense for central bank to join forces with fiscal authorities to fight the COVID war. In our view, the simplest and least compromising way to do this is through yield curve control; control both short- and long-term interest rates to keep government financing costs low. For now, however, with interest rates very low across the yield curve, the benefits of capping long-term interest rates would be modest.