ECB’s Villeroy Rebuffs French Adviser’s Helicopter Cash Proposal
European Central Bank policy maker Francois Villeroy de Galhau has rejected a suggestion from a prominent think tank in his native France that the ECB should make helicopter money -- direct cash transfers to the population -- a part of its toolkit.
“Helicopter money, which has never been implemented and would be complex in practice, doesn’t seem like a good idea to us,” the Bank of France governor said in emailed remarks from an event with French senators.
The knockback came after the non-partisan Council of Economic Analysis, which reports to the nation’s prime minister, said the tool could be effective in boosting inflation if price growth is persistently weak after the pandemic.
It noted that the ECB has failed to sustainably hit its inflation target since 2015 despite negative interest rates, quantitative easing and free loans to banks. At the same time, those tools have raised questions about the impact on inequality and the central bank’s independence from governments.
“Adding this instrument to monetary policy would limit the continuous increase of asset purchase programs with their potential collateral effects,” authors Philippe Martin, Eric Monnet and Xavier Ragot wrote. “Given the uncertainties related to getting out of the Covid-19 crisis, we consider that this contingent strategy should be decided once health restrictions have been lifted.”
Villeroy said it would create a “massive” hole in the central bank’s balance sheet, and confuse the roles of fiscal and monetary policy. He said it shouldn’t be part of the ECB’s strategic review, which is examining the institution’s suite of policy tools and overall mission.
The ECB has spent more than 4 trillion euros ($4.9 trillion) on its two main bond-buying programs, cut interest rates to -0.5%, and effectively subsidized banks with long-term loans. While the nascent economic recovery has pushed inflation to 2%, just above target, policy makers say it will fade again.
The Council of Economic Analysis acknowledged that helicopter money is considered controversial, and said it should be a “last resort,” but went on to show how effective it could be.
Value for Money
It estimates that a monetary transfer to individuals amounting to 1% of economic output would increase the inflation rate by 0.5 percentage point over a year. It reckons that step would only cost the equivalent of 385 euros per individual -- far below the amount the U.S. government sent to households as part of its fiscal stimulus package this year.
The measure could be renewed as long as the inflation target isn’t met, and would be easier to wind down than the bond-buying programs, which affect the management of public debt.
It would need to be coordinated with fiscal policies, so that governments don’t counteract it with tax increases.
“If the introduction of helicopter money succeeds in bringing the inflation rate back toward its target, it would allow for a more rapid normalization of monetary policy with regard to both asset purchases and interest rates,” the authors wrote. “From this point of view, this monetary instrument might be more acceptable to some countries -- eg Germany -- for which the ECB’s unconventional monetary policy is most problematic.”
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