What is your concept of money
Ex-central bankers are in favor of helicopter money
But most of the proposals, including the new one of the four economists, do not go that far. The idea is much more to let the central bank finance government spending very directly. This contradicts regulatory notions of a strict separation of the two areas, which were once developed to contain the likelihood of excessive inflation.
In Germany in particular, with its experience of hyperinflation in the 1920s, the idea of helicopter money met with reluctance. However, the problem today is inflation that is too low rather than too high.
The helicopter money proposal was formulated in the run-up to the central bankers conference in Jackson Hole, USA, but is now making the rounds and is being discussed on Twitter, among other things.
“That had to happen,” comments Vítor Constâncio, ex-vice of the European Central Bank - and shows a certain sympathy for the proposal: “Cooperation between monetary and fiscal policy is the way forward, but only until the inflation target is reached has been achieved, ”he writes. Stefan Gerlach, ex-Vice Chairman of the Irish central bank, on the other hand, argues that governments should first take on their responsibility and use the leeway for a more expansive financial policy.
More coordination of financial and monetary policy
The four economists state that the central banks have reached the end of their possibilities. Then, the authors of the study conclude, the governments would have to step in with a more expansive financial policy. However, they point out: "Fiscal policy should play a bigger role, but that alone is unlikely to help."
As a result, they call for more coordination of monetary and financial policy. And basically formulate their concept as follows: “Explicit monetary financing in sufficient quantities will increase inflation. Without an implicit limit, however, it would undermine the institutional credibility and lead to uncontrollable national debt. "
You are therefore proposing a “Standing Emergency Fiscal Facility” (SEFF). It is only supposed to be activated by the central bankers and made available to the governments if interest rates cannot be reduced any further and “if the inflation target is expected to be clearly missed”. Most central banks want to reach around two percent inflation.
In a way, the proposal is a continuation of the previous trend towards an increasingly relaxed monetary policy. Since the financial crisis, massive purchases of government bonds by the central banks have blurred the line between monetary and financial policy.
The most radical proposal to date on this subject is known under the acronym MMT - Modern Monetary Theory. It boils down to letting the central banks finance government spending up to guaranteeing full employment and preventing inflation through tax increases: This amounts to a reversal of the roles of monetary and financial policy.
There are even more radical proposals
However, the new proposal by the four economists is still a long way off. In purely economic terms and with a view to the current situation, closer cooperation between monetary and financial policy is justified. In times of high inflation, both areas have opposing interests and tasks: Governments want to spend money and central bankers want to prevent prices from rising too much.
If inflation is too low, on the other hand, the interests of both areas tend to be aligned: keeping the economy going and stabilizing inflation. On the other hand, once central bank independence is destroyed, it can be difficult to restore it when it becomes more important again.
More:The young democrat Alexandria Ocasio-Cortez advocates the so-called Modern Monetary Policy. The central bank takes on the role of the financier of the state. Read more here.
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