Helicopter Money Drop, or QE for the People or some other Unconventional Macroeconomic Tool…? Hoping the Government of India isn’t Looking to Buy into and Sell this Rhetoric in Defense of Demonetisation.

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.

This famous quote from Milton Friedman’s “The Optimum Quantity of Money” is the underlying principle behind what is termed Helicopter Money, where the basic tenet is if the Central Bank wants to raise inflation and output in the economy, that is below par, potential, the most effective tool would be simply to give everyone direct money transfers. In theory, people would see this as a permanent one-off expansion of the amount of money in circulation and would then start to spend more freely, increasing broader economic activity and pushing inflation back up to the central bank’s target. The notion was taken to a different level thanks to Ben Bernanke, former Chairman of FED, when he said,

A broad-based tax cut, for example, accommodated by a programme of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead rebalanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.

The last sentence of the quote obviously draws out the resemblances between the positions held by MF and BB, or helicopter money and quantitative easing, respectively. But, there is a difference that majorly lies in asset swaps for the latter, where the government bond gets exchanged for bank reserves. But, what about QE for the People, a dish dished out by two major ingredients in the form of financial excesses and communist manifesto!!! Thats a nice ring to it, and as Bloomberg talked of it almost a couple of years back, if the central bank were to start sending cheques to each and every household (read citizen), then most of this money would be spent, boosting demand and thus echoing MF. But, the downside would be central banks creating liabilities without corresponding assets thus depleting equity. Well, thats for QE for the People, the mix of financial excesses and communist manifesto. This differentiates with QE, as in the process of QE, no doubt liabilities are created but central banks get assets in the form of securities it buys in return. While this alleviates reserve constraints in the banking sector (one possible reason for them to cut back lending) and lowers government borrowing costs, its transmission to the real economy could at best be indirect and underwhelming. As such, it does not provide much bang for your buck. Direct transfers into people’s accounts, or monetary-financed tax breaks or government spending, would offer one way to increase the effectiveness of the policy by directly influencing aggregate demand rather than hoping for a trickle-down effect from financial markets.

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Assuming Helicopter Money is getting materialized in India. What this in effect brings to the core is a mix of confusion fusion between who enacts the fiscal and who the monetary policies. If the Government of India sends Rs. 15 lac to households, it is termed fiscal policy and of the RBI does the same, then it is termed monetary policy and the macroeconomic mix confusions galore from here on. But, is this QE for the People or Helicopter drop really part of the fiscal policy? It can’t be, unless it starts to be taken notice of the fact that RBI starts carrying out reverse repurchase operations (reverse repo), and plans to expand its multiple fold when it raises its interest rate target in order to put a floor on how far the funds rate could fall. And thats precisely what the RBI undertook in the wake, or rather during the peak of demonetisation. So, here the difference between such drops/QE for the People and QE becomes all the more stark, for if the RBI were to undertake such drops or QE for the People, then it would end up selling securities thus self-driving the rates down, or even reach where it has yet to, ZIRP. Thus, what would happen if the Government does the drops? It’d appear they spend money and sell securities, too. But in that case, people would say the security sales are financing the spending. And in their minds this is the fiscal policy, while the RBI’s helicopter money is monetary policy. If the confusions are still murky, the result is probably due to the fact that it is hybrid in nature, or taxonomically deviant.

It seems much clearer to simply say that (a) the act of creating a deficit—raising the net financial wealth of the non-government sector is fiscal policy, and (b) the act of announcing and then supporting an interest rate target with security sales (or purchases, or interest on reserves), which has no effect on the net financial wealth of the non-government sector is monetary policy. In the case of (a), whether the RBI cuts the cheques, it’s fiscal policy, and with (b), whether the RBI sells securities, it’s monetary policy. In other words, fiscal policy is about managing the net financial assets of the non-government sector relative to the state of the economy, and monetary policy is about managing interest rates (and through it, to the best of its abilities, bank lending and deposit creation) relative to the state of the economy.

So, how does this helicopter drop pan with India’s DBT, Direct Benefit Transfers or getting back the back money to be put into accounts of every Indian? What rhetoric to begin and end with? Let us go back to the words of Raghuram Rajan, when he was the Governor of the RBI. “It is not absolutely clear that throwing the money out of the window, or targeted cheques to beneficiaries… will be politically feasible in many countries, or produce economically the desired effect,” he said because the fiscal spending hasn’t achieved much elevated growth. So, bury the hatchet here, or the government might get this, import this rhetoric to defend its botched-up move on demonetisation. Gear up, figure out.

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