What can monetary policy do if a new recession occurs? According to the central bank of Sweden’s Deputy Governor, so-called helicopter money could be one possible answer.
In a speech given in Stockholm on May 19th 2016, the Riksbank’s Deputy Governor Cecilia Skingsley emphasized the need to consider all possible monetary policy options, including the now well-debated concept of ‘helicopter money.’ This term refers to a policy proposals whereby central banks would distribute money directly to People, for instance as a citizens’ dividend. It is the most straightforward way to implement a QE for People policy.
Towards the end of her speech (see the full speech here), Skingsley says the concept deserves more consideration:
many central banks have started to conduct various types of unconventional monetary policy, primarily purchases of various securities. There is reason to further consider whether this is something that could be developed and perhaps take new forms. One idea that has seen lively discussion recently, albeit perhaps more among academics and economic debaters than among central bank representatives, is what is known as helicopter money. Briefly, this means that the central bank, in various ways, more or less directly transfers money to the actors in the economy. One way is to increase public expenditure or lower taxes and fund this by increasing the money supply.
Further Skingsley says:
Of course, there are a number of practical and legal challenges inherent in this, such as integrating such measures into an operational monetary policy framework and ensuring an appropriate division of responsibilities between the central bank and the government or parliament. It is also probably something that should not be tried until other possibilities have been exhausted. However, considering the difficulties that are still weighing many of the world’s economies down, I think that it is wise to discuss the different possibilities, without closing any doors.
Getting prepared for the next recession
Skingsley emphasizes the need for central banks to think about alternative tools. Indeed, if a new crisis occurs, central banks will be left with much less scope for manoeuvre than they were in 2008:
If a recession should occur within, say, the next five years, our scope for cutting the repo rate would probably be very limited. Neither is this anything unique to the Riksbank – it is true for more or less all central banks. What, then, can central banks do to attempt to increase their degree of freedom in the period ahead?
We would argue that the current monetary easing programmes, such as quantitative easing, are actively contributing to bringing about another financial crisis. In this context, central banks should dedicate much more research into policy alternatives that would bring more financial stability while being more effective in achieving their inflation target.
The Riksbank’s move follows a wave of statements from central bankers expressing open-mindedness about QE for People ideas. After the ECB’s Chief Mario Draghi saying he founds the concept ‘very interesting’, the former Chair of the Federal Reserve, Ben Bernanke also said that it would be ‘premature’ to rule out helicopter money.
Now central bankers need to put their words into action by researching QE for People proposals and putting forward a concrete plan about how to implement these proposals, in ways that would preserve they independence and accountabilities. If Skingsley is right when she says, “we know that sooner or later, a new crisis will inevitably arrive”, then it’s never too early to prepare for this eventuality.