Tag: Kermit Schoenholtz

Must-Read: Steve Cecchetti and Kermit Schoenholtz: A Primer on Helicopter Money

Posted on by Brad DeLong

Must-Read: Ummm… But aren’t the objections to expansionary fiscal policy today all that they involve governments taking on interest rate risk–that that is not a risk governments today ought to bear? And so isn’t the fact that helicopter money extinguishes that risk and is a more stable fiscal policy than bond-financed spending the entire point?

So I don’t understand…

Steve Cecchetti and Kermit Schoenholtz: A Primer on Helicopter Money: “Helicopter money is not monetary policy…

…It is a fiscal policy carried out with the cooperation of the central bank…. If the yield curve still has any upward slope, issuing reserves rather than long-term bonds to finance fiscal expenditure will appear cheaper in terms of current debt service. However, this apparent saving is an illusion because it ignores interest rate risk…. Helicopter money may strain the relationship between the fiscal and monetary authority… creating a situation commonly known as ‘fiscal dominance.’… A central bank does not face rollover risk, so a fiscal expansion financed by central bank money is more stable than one financed by bond issuance…. But is rollover risk really a concern for the government of most advanced economies? We doubt it….

Helicopter money today is… expansionary fiscal policy financed by central bank money. And, if interest rates have fallen to the ELB, it is neither more nor less powerful than any bond-financed cut in taxes or increase in government spending in combination with QE.

Must-Read: Steve Cecchetti and Kermit Schoenholtz: Spillovers, Spillbacks and Policy Coordination

Posted on by Brad DeLong

Must-Read: The very sharp indeed Steve Cecchetti and Kermit Schoenholtz on how, contrary to the models of the early 1980s–and, I fear, the view of the world still held by the FOMC–U.S. monetary tightening is not expansionary for the rest of the world:

Stephen G. Cecchetti Kermit L. Schoenholtz: Spillovers, Spillbacks and Policy Coordination: “Reserve Bank of India Governor Raghuram Rajan’s recent plea for increased coordination is merely the latest protest by emerging-market economy (EME) policymakers about the spillovers from advanced-economy (AE) monetary policy…

…We are still at the early stages of understanding all of this…. Perhaps the real question is whether AE policymakers have underestimated not only the spillovers, but the potential for spillbacks… are insufficiently attentive to the financial stability risks that their policies may cause—not just domestically, but globally…..

The leverage of some intermediaries rises markedly when the accommodation is sustained…. After two years of policy easing… the leverage of the median bank rises from 10.2 to 12.5. For insurance companies, leverage rises from 6.5 to 7.4…. The impact on leverage abroad from an easing of U.S. monetary policy is a multiple of the impact of easing by the home-country central bank! For example, non-U.S. bank leverage jumps from a baseline of 15.8 to 23.6….

Spillovers spillbacks and policy coordination Money Banking and Financial Markets

The dollar’s position in the global economy is special…. This Global Dollar system… magnifies the impact of changes in Federal Reserve policy on the behavior of intermediaries around the world…. [Global] inancial stability depends on the stability of dollar funding. This, in turn, means that the Federal Reserve has an obligation that other central banks do not have: namely, to prevent a collapse of dollar intermediation globally. In the end, this is very clearly in the U.S. interest because the spillbacks from global financial instability will almost surely be large.