Do We Really Need Helicopter Money?
However, the real world counterpart would more likely take the form of a conventional income tax cut financed by the central bank, creating reserves and using them to buy government bonds. It is certainly not clear if this approach could spark a meaningful revival in aggregate demand. Although the proponents of quantitative easing might claim it has had positive impact on credit-sensitive sectors like homebuilding and motor vehicles, further reliance on central bank financing to provide a tax cut does not guarantee additional demand. Indeed, if households treat helicopter money as transitory income, then the majority of it might end up in savings.
Directing helicopter money to businesses would not likely act as a magic elixir, either. Despite having access to cheap credit and the benefits of high equity prices, companies have been more inclined to engage in financial engineering than undertake new investment, which could help boost employment, wages and productivity. As inventories build and anemic global trade shows few signs of reviving, it is hard to put forth an optimistic case where firms engage in long-term productive investment.
Given the stresses witnessed in financial markets since the beginning of the year, it might be time for central banks to reflect seriously on whether the use of (formerly) unconventional policy tools is still warranted. The recent adoption of negative interest rates (on excess reserves left on deposit at central banks) is viewed in some quarters as just one more sign that central banks have lost their lofty perch as seers and custodians of a financial system that should be focused on facilitating the sound functioning of the real economy. With this recent action of central banks, a new set of risks beckons as negative interest rates drive attempts at stimulus through the credit supply side—in effect, encouraging banks to make new loans regardless of the demand for funds.
As more investors come to realize that central bankers are not omnipotent, central bankers will need to recognize that the retreat from unconventional monetary measures is going to be extremely tricky. The most difficult trick will likely be managing monetary policy to facilitate an orderly decline in the price of assets that have been overly inflated by the previous actions of the world’s premier central banks. The pattern where the failure of unconventional monetary policies leads to more, rather than less, of the same must be broken. Otherwise the global economy could face a difficult recession—accompanied by the possibility of another episode of financial systemic risk.