http://www.voxeu.org/article/helicopter-money-today-s-best-policy-option
With the Fed at the Zero Lower Bound this is basically the only policy option that could help jumpstart demand relatively quickly.
I have a question about this though:
If overt financing doesn't create public debt why don't we do that for all of our federal spending?
As provocatively discussed by Friedman (1969), helicopter money is a policy whereby new money is created by the central bank and provided directly to households and private businesses. Grenville (2013) notices that central banks have no mandate to give money away (they can only exchange one asset for another), and that such decisions need to be backed by the budget-approval process. In most countries, therefore, central banks cannot conduct helicopter money operations on their own – helicopter money must involve fiscal policymaking.1
Buiter (2014) focuses on the application of helicopter drops through overt monetary financing, whereby the central bank creates new money to finance a fiscal stimulus. He identifies the conditions under which such a helicopter drop increases aggregate demand. One of these conditions is the irreversibility of the new money base stock creation, which constitutes a permanent addition to the total net wealth of the economy, which is made possible by the (‘fiat’) money base being an asset for the holder but not a liability for the issuer (Buiter 2004).
Such irreversibility can be attained if overt monetary financing operations are executed by one of two routes.
•The first is by having the government issue interest bearing debt, which the central bank would buy and hold in perpetuity, rolling over into new government debt when the existing debt on its balance sheet reaches maturity.
In this case, the government would face a debt interest servicing cost, but the central bank would make an exactly matching profit from the difference between the interest rate it receives on its debt and the zero cost of its money liabilities, and would return this profit to the government.
•A second route is having the central bank buy government securities which are explicitly non-interest bearing and never redeemable.
In terms of the fundamentals of money creation and government finance, the choice between these two routes would make no difference (Turner 2013).
Note that the irreversibility condition has nothing to do with the fact that, at any future date, the central bank might decide to withdraw part or all of the liquidity injected in the system by selling its own bonds. In this case, the holders of liquidity would exchange it for the bonds sold by the central bank, but the total net worth of the economy would not change, only its composition would (shifting from more to less liquid assets). The addition to the economy’s net worth originally operated through the overt monetary financing would not be undone by any new open market operation.
Note that where overt money financing operations are run by the Treasury, without involving the central bank (see below), neither of the two routes above is necessary, since the Treasury directly finances the budget by issuing money or a money-like instrument.
With the Fed at the Zero Lower Bound this is basically the only policy option that could help jumpstart demand relatively quickly.
I have a question about this though:
•Finally, and most importantly, overt money financing involves no increase in public debt, whereas conventional bond financing does.
If overt financing doesn't create public debt why don't we do that for all of our federal spending?