Why the Helicopter Money Idea Is Destined to Fly Away

DONATO MASCIANDARO SHOWS THAT AN OPTIMAL HELICOPTER MONEY POLICY WOULD BE POSSIBLE, BUT ITS DISTRIBUTIONAL EFFECTS MAKE IT UNLIKELY TO HAPPEN IN EUROPE. AND THE RECENT JUDGEMENT OF THE GERMAN CONSTITUTIONAL COURT MAKES IT EVEN LESS LIKELY, THE AUTHOR COMMENTS

COVID-19 swept away many conventional taboos, including the idea of helicopter money - that is printing money and handing it out to people with no strings attached. In a paper recently published in the CEPR COVID Economics series and as a SUERF Policy Note, Donato Masciandaro, Full Professor of Economics of Financial Regulation at Bocconi, shows that if an independent central bank acts as a long-sighted policymaker, an optimal helicopter monetary policy can be enacted. But in a world where countries are run by career-concerned politicians and heterogeneous citizens are differently affected by the distributional effects of helicopter money such a policy is unlikely to happen.
 
“The fact that the redistributive effects of  monetary policy can increase the hostility towards an independent central bank  is even more evident in these days, after the judgment that the German Constitutional Court  delivered on the legality of ECB bond buying program a few days ago”, comments Professor Masciandaro. “In fact, the judgement of the Court is based on arguments regarding monetary policy effects on  ‘public debt, personal savings, pension and retirement schemes, real estate prices, and keeping economically unviable companies afloat’. These are redistribution issues, although they have been summarized inside the legal category of the ‘principle of proportionality’ that the ECB should respect in achieving its monetary stability aim, following the Court’s interpretation”.  
 
The paper analyzes a so-called soft helicopter money scenario, in which a government adopts a financial backstop for households and firms through monetary cash transfers and the central bank finances such a policy, thus producing losses in its own balance sheets. This solution does not imply any permanent change in the overall money base and no higher risks of inflation, which usually acts as a regressive tax. This scenario matches the hypothesis of a European Transfer Plan putting together all national needs related to the pandemic recession. Such European fiscal backstop would be financed through European Union assets by issuing COVID Perpetual Bonds, with the ECB acting as buyer of these Bonds.
 
In Prof, Masciandaro’s model, an optimal helicopter monetization exists and is higher:
 

• if the labor supply is relatively elastic
• if the cost of debt servicing is high and
• if the monetary instability risks are low.

 
In the real world (with career-concerned politicians in charge of national governments and heterogeneous citizens), the feasibility of such a mix of financial backdrop and helicopter monetization in Europe depends on the cost-benefit analysis of the national governments. As the policy produces distributional effects with winners and losers, the latter will pressure their governments not to implement the policy, and conflicts between politicians and the European Central Bank will arise, making the policy unlikely.
 
In particular, the number of citizens against the helicopter money will be higher if:
 

• the majority of voters are wealthy people
• the interest rate is higher
• the monetary stability risks are higher and
• the fiscal backstop covers a smaller part of the needs related to the COVID recession.

 
Donato Masciandaro, “Shh, Don’t Say It! ECB Helicopter Money: Economics and Politics”, SUERF Policy Note, Issue No 161.
 

by Fabio Todesco