Czech Central Banker says helicopter money is “a real and viable possibility”, whose implementation would be facilitated by the introduction of a public digital currency.
There used to be a time when ‘helicopter money’ (aka transfering newly created money directly to citizens) was portrayed as a fanciful idea that central bankers would laugh about. But over the past few years it has been increasingly discussed among civil society and even central bankers themselves are taking it more seriously.
ECB’s Mario Draghi and Peter Praet famously backed the idea in 2016 and so has Janet Yellen. Now another European central banker has endorsed it too. Mojmír Hampl, Czech Bank’s vice-governor made a speech recently where he strongly advocated the implementation of a central bank digital currency. He stressed the need for a public backed digital currency to overcome the problems of many of the cryptocurrencies today including Bitcoin, Lite and others.
He identifies a number of problems: first is the sheer volume of energy consumption from cryptocurrencies. Hampl says ‘the bitcoin ecosystem consumed twice as much energy as Nigeria’ adding that ‘Bitcoin as a quasi-currency was created to make payments cheap and fast, while in reality it is more often than not expensive and slow.’
The primary failure of private cryptocurrencies is its function as a medium of exchange. Many organisations, agencies and banks do not accept cryptocurrencies as a means of payment. Other concerns with cryptocurrencies are linked to price stability and lack of public oversight.
A central bank backed digital currency could help overcome many of these difficulties.
A well designed central backed digital currency could mean:
- More financial stability
- Diversifying the shape money takes in the economy
- More financial inclusion
- More efficient deployment of monetary policies
The last point ties well to Hampl’s point of twinning deployment of monetary policies through digital cash:
central bank digital currency brings another potential response to the problem of the effective lower bound: an easily implementable “helicopter money drop”, i.e., direct support of consumption. Of course, this is an even more controversial idea than negative interest rates, at least in the world of central banking. But I believe it is a real and viable possibility in the event of a deep crisis akin to the one of the late 2000s. In this way, central banks could stimulate consumption directly at the individual level, circumventing the transmission uncertainty associated with quantitative easing. Moreover, such a windfall for all households could also boost consumer confidence at a time when optimism is most needed.’
He adds, ‘In addition…the recipients of helicopter money would simply be the country’s citizens – a bit like in the case of dividend payments with all households receiving the same amount.’
These arguments are in line with Positive Money Europe’s key demands of the European Central Bank (ECB) to roll out a digital euro for all eurozone countries and use ‘helicopter money’ instead of quantitative easing. A central bank digital currency would enable quicker implementation of monetary policies such as cash transfers to people.
Helicopter money would be more transparent than QE
As we have stated previously, cash transfers to citizens are more transparent, fairer and would require less money than conventional monetary policies such as the ECB’s Quantitative Easing programme.
Common criticisms leveled at central banks issuing helicopter money are that this function belongs to governments as it charters into fiscal territory, or that it would incur a loss for central banks.
Hampl tackles both criticisms. Firstly, he argues that helicopter money’s distributive impact would not be new, as any change in the interest rate, just like any other change in the monetary policy stance, inevitably redistributes funds, and indeed does so in a much less transparent way.” he adds.
Secondly, Hampl clearly debunks the idea that helicopter money would lead to central bank’s bankruptcy.
The immediate consequence of helicopter money would be a financial loss for the central bank, but central bankers should value the price stability of the nation above their income statement. Financial history of my home country seems to be indicating that there is little interplay between the central bank’s financial position and inflation or financial stability performance. So, central banks with less capital, perhaps depleted by helicopter money drops, are unlikely to underperform in the future.
Admittedly, central banks can implement helicopter money already. But according to Hampl, it would be easier to distribute money to citizens if the central bank has already introduced a digital currency. Hampl says ‘the benefit of using a digital currency, is that the central bank would not theoretically need to work with the government, so its independence would not be put in danger.’
The ECB has not ruled out helicopter money but remains cautious about introducing digital currencies.
It is fantastic to see more and more central bank leaders advocating the benefits of helicopter money and now digital cash. A central bank digital currency would look very different to the cryptocurrencies raging across the stock markets right now. It would be tailored to the needs of both citizens through cash transfers as well as financial actors. However, a transformative tool such as digital cash needs leadership from leading central banks, including the ECB.
We will continue to work towards making helicopter money and a public backed digital currency a reality in the Eurozone.
Credit picture: Czech Parliament