NCPA - National Center for Policy Analysis

Monetary Policy for the Next Recession

June 2, 2015

Using quantitative easing (QE), the big central banks have made and continue to make amazing efforts to support demand and keep their economies running since 2008. But QE isn't new anymore and it mostly works.

The world avoided another Great Depression. Now imagine a big new financial shock. What then?

The obvious answer is fiscal policy. But bringing fiscal expansion to bear in an effective way proved difficult after 2008. Next time around, it might be harder still, because public debt has grown and concerns about government solvency will be greater. Attention needs to turn to a new kind of policy: helicopter money.

Milton Friedman argued central banks could defeat deflation by printing dollars and dropping them from helicopters. Most people think the notion is crazy. If central banks need to expand demand ― and interest rates cannot be cut any further ― let them send a check to every citizen. Much of this money would be spent, boosting demand. Nobody is arguing that it would not be effective. What, then, is the objection?

The only non-trivial economic objection to overt monetary financing is that the central bank might find it difficult to control interest rates later.

But if traditional QE does not cause banks to lose control of interest rates, then neither does helicopter money. The central bank can still do three things to tighten policy:

  • Raise the rate of interest on reserves;
  • Issue debt or sell bonds on its balance sheet;
  • And raise reserve requirements.

The real objection is political not economic. Sending out checks is a hybrid of monetary and fiscal policy ― public spending financed by pure money creation. That is why it would work.

Source: Clive Cook, "Monetary Policy for the Next Recession," Bloomberg View, May 31, 2015.


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