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

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.

June 27, 2016


Brad DeLong
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