Eight pitfalls to avoid in the helicopter money debate

Learn first, then teach

Professors Stephen Cecchetti and Kermit Schoenholtz are the latest to opine on the subject of helicopter money. It is worth quoting from their opening paragraphs, it frees me up to respond quite bluntly:

“We are wary of joining the cacophony of commentators on helicopter money, but our sense is that the discussion could use a bit of structure. So, as textbook authors, we aim to provide some pedagogy.”

I wish they had heeded their wariness – they give textbook authors a bad name.

To provide some structure to future discussions, I will set out eight of the pitfalls many economists make in initially considering helicopter money. Cecchetti & Schoenholtz are no exceptions – they fall for all eight.

1. They don’t define ‘helicopter money’ (on this occasion a trip to wikipedia will suffice). The closest Cecchetti & Schoenholtz come to doing so, around halfway through the article, is to assume what they set out to prove: “As we understand it, helicopter money is a fiscal expansion that is financed by central bank money rather than by bonds”. Oh, I guess it is fiscal then.

2. They don’t outline a clear distinction between fiscal and monetary policy (it’s not self-evident!).

3. They observe that helicopter money is just like ‘combining bond-financed fiscal expansion with … QE’. No one that I am aware of who has thought for long about helicopter money thinks that, subject to certain conditions, it is not economically equivalent to QE combined with tax cuts. That is the start of an interesting conversation, not the conclusion.

4. When they analyse central banks balance sheets, economists become second-rate accountants, and accountants become … actually, it totally depends on the accountant. Suffice it to say, the IOR is not really an interest rate, bank reserves are not liabilities at book value, tiered reserves are a game-changer, and QE with expected losses is not fundamentally distinct to lending to banks at interest rates below the IOR.

5. They think that because reserves pay IOR in certain jurisdictions this means a fundamental tenet of economics – that money is different to debt – is no longer the case. This is an analytical error. The IOR does not fundamentally change the nature of money. Money is not debt, which is why we have monetary policy and independent central banks.

6. They ignore crucial legal and institutional distinctions. When it comes to helicopter money, the Fed, the ECB, the Bank of England, and the Bank of Japan all face very different sets of institutional requirements and constraints. In the Eurozone, the legal and institutional case for helicopter money appears strongest.

7. They don’t realise that central banks are already doing helicopter money – just opaquely.

8. They haven’t read these articles (below) which are essential reading, and have typically pre-empted, and refuted, what they are about to assert as clarification.

By falling for each of these eight pitfalls, Cecchetti & Schoenholtz, have, in their own way, made a pedagogic contribution.

Curiously it looks as if the Cecchetti & Schoenholtz August Vox article is the same as a piece they wrote in June

Milton Friedman AER 1968 Presidential address Cecchetti & Schoenholtz also make the very common mistake of focusing on Friedman’s Optimum Quantity of Money paper, where he introduces the analogy of helicopters dropping dollar bills, but is not discussing monetary policy in a ‘liquidity trap’. The more relevant Friedman article is his AER presidential address, which in fact discusses what to do when rates can go no lower and QE is redundant. I have discussed Friedman’s arguments here.
Paul Krugman Helicopters dont help
My reply A brief reply to Paul Krugman on policy equivalence
Nick Rowe Helicopter money is permanent
Martin Sandbu Monetary helicopters hover back into view
Martin Sandbu Helicopter money: if not now, when?
Adair Turner Demystifying monetary finance
Simon Wren-Lewis Money and Debt
Simon Wren-Lewis Helicopter money and fiscal policy
Earlier posts from this site that are also pertinent:
Legal helicopter drops in the Eurozone
Does the central bank’s balance sheet matter?
Accounting as religion
The economics of language
There are two types of negative interest rates

Finally, I should say that all these observations have been sharpened by Twitter (and non-Twitter) exchanges with Simon Wren-Lewis, Martin Sandbu, Mark Blyth, Brad DeLong, Martin Wolf, Nick Rowe, JP Koning, Toby Nangle, Willem Buiter, Markus Demary, Narayana Kocherlakota, Tony Yates, Dario Perkins, Matthew Klein, Richard Baldwin and many others. All errors are mine.

About The Author

Eric Lonergan is a macro hedge fund manager, economist, and writer. His most recent book is Supercharge Me, co-authored with Corinne Sawers. He is also author of the international bestseller, Angrynomics, co-written with Mark Blyth, and published by Agenda. It was listed on the Financial Times must reads for Summer 2020. Prior to Angrynomics, he has written Money (2nd ed) published by Routledge. He has written for Foreign AffairsThe Financial Times, and The Economist. He also advises governments and policymakers. He first advocated expanding the tools of central banks to including cash transfers to households in the Financial Times in 2002. In December 2008, he advocated the policy as the most efficient way out of recession post-financial crisis, contributing to a growing debate over the need for ‘helicopter money’.

15 Responses

  1. nicoletta forcheri

    5. “Money is not debt”. I agree but actually what we use AS money is CIRCULATING DEBT
    7. If Central Banks already do helicopter money they do it with banks certainly not with people, which should be the real aim of HM

  2. Danny Axford

    I still see a liability on the central bank. That is an obligation to remain credible. With a failure in that obligation I could see the possibility of a populous gradually switching to making settlements in a different currency.

  3. JKH

    I offer a cherry picked asset-liability assessment:

    a) Asset – I think your general framing of the “permanence” issue is quite coherent and a too rare intelligent approach to this particular aspect. It’s an advancement in clearing thinking on the subject. The typical use of the term by economists as applied to either QE or HM is incredibly sloppy and reprehensible in my view (e.g. Krugman). Apart from being unnecessary and undesirable and inappropriate as framing for the right kind of policy commitment in order to get either QE or HM to work, there is usually no reference whatsoever to the dynamics of how the central bank balance sheet will project out over time on an analytic scenario basis – including the currency component. That said, Woodford makes a good point (link below) even while using the term – that it should apply if used to whatever degree to both QE and HM, and that “permanence” certainly should not necessarily be a differentiating criterion applied to HM but not QE. I notice this false differentiating criterion is coming into play a lot, and it just exacerbates the problem when compounded on top of the use of such a flakey idea in the first place.

    b) Liability – in the Turner/Woodford interview linked below, I notice that their shared framing is that of HM as fiscal policy financed by money. And there are a lot of other examples of those who do that. I think you lose unnecessary traction in advancing the idea by insisting on a monetary policy category. First, I think it’s the wrong way to frame it. Second, I see no net benefit to you in making such a case. Your insistence that it is monetary policy is no less obsessive than what you allege the other side is doing in insisting that it is fiscal policy. What’s to be gained? It’s just a distraction from the merits of the argument.



    • Eric Lonergan

      JKH – I think we actually agree on this. I am not saying the helicopter money is always & everywhere ‘monetary policy’. I argue – and this is a problem for economists used to ignoring institutions – that it is likely to depend on the jurisdiction. Helicopter money can be purely monetary (and I suspect that this is institutionally optimal), but it could also be a combined action by treasuries and CBs. I think Bernanke’s institutional arrangement for the US, may be the only way the Fed can do helidrops, to households, at least. But this would be explicitly illegal in the EZ. I think the UK could set up a specific independent fiscal authority to work with the BoE – or legislate to give the BoE a new power (my preferred way, and one Simon Wren-Lewis, Mark Blyth & I outlined in the Guardian). In the Eurozone, where there is legal and institutional dominance of monetary policy, the ECB is legally required NOT to involve the fiscal institutions.

      I should clarify. As you know, Most commentators don’t bother to actually clarify the distinction between monetary and fiscal policy. I simply observe that if the supply of base money is being altered, it’s monetary policy. So helicopter drops will always involve monetary policy, although not necessarily exclusively.

      • JKH


        “So helicopter drops will always involve monetary policy, although not necessarily exclusively.”

        I think that’s getting closer.

        I tend to think of a differentiation between policy formulation and policy implementation. And I compare the policy process to that of a commercial bank where a senior management committee (and ultimately the Board of Directors) delegate a risk policy that is formulated in terms of limits to a trading function. Typically, the trading function will present its own proposal for a risk limit authority to the risk committee for approval, and the committee will then formally delegate that authority when approved to the trading desk. I suspect you’re familiar with this kind of thing.

        The analogy would be that of the central bank corresponding to the commercial bank trading desk. (I’m aware that actual central banks have their own internal risk management processes, but that’s not in my analogy here.)

        The analogue to the risk committee is somewhat amorphous and regime dependent – but in a broad sense it has to involve the idea of an ultimate fiscal authority. This is true in the case of conventional monetary policy, since the income statement of the central bank has a direct effect on fiscal results. And it should be true in the case of helicopter drops, because the act of making payments directly to the Treasury or to individuals will in fact cause a debit to central bank equity. It is a fiscal consequence in the form of a principal balance sheet transaction as opposed to being an income statement derivation (unless bonds are involved, in which case it is in effect a limiting version of QE – as the time lag between fiscal action and bond purchase goes to zero).

        (Sorry for the accounting, but accounting will end up being necessary one way or another – to keep track of stuff you know.)

        Note that even in the case of the ECB, income statement results affect fiscal positions through their effect on capital share income of the sovereigns.

        Anyway, I see a necessary process whereby the central bank gets its HM authority from somewhere, and then indeed can execute that authority “independently” with respect to the timing and amounts available within approved risk limits – relative to the context for such independence of action that is implicit in the formulated authority.

        What I’ve said is perhaps more readily adaptable to the cases of the US, Canada, and maybe the UK. I know you point to the ECB as a particular case, and I’m not sure how that would work. Perhaps the authority is self-formulated in a “whatever it takes” mode. But I view this as a chaotic policy example in an institutional setting that has failed spectacularly in terms of a more generally effective fiscal –monetary policy nexus.

  4. Denys

    I think their article is a valuable contribution. My understanding is that this article would represent the views of any current central banker or Treasury official – because it sets out the actual procedures and accounting entries that would take place under arrangements currently in place.
    The value of this article is that you can use it to analyse the critical changes in policy that would have to be made, and accepted, in order to proceed down routes suggested by helicopter enthusiasts. Some examples of the author’s working assumptions……
    1. Helicopter money consists of transfer payments to households and are not loans. “Helicopter money is a fiscal expansion financed by central bank money rather than by bonds”. They put this in italics to emphasise it. Implicit in this statement, I believe, is that transfer payments are the domain of governments and not central banks. In other words, however the money is created, the decision on distribution, and its execution, lies with fiscal authorities.
    2. The authors say that helicopter money “is not about $100 bills dropping from the sky, a la Friedman. Nor is it either QE per se……[ nor] an intergovernmental transfer, like the remittance of interest income from the central bank to the Treasury” . Items 2 and 3 are happening now and we don’t call them helicopter money, so this seems correct. As for point 1., I think he means that we are in an electronic world where large cash/note transfers are not used.

    3. Central banks balance sheets have to balance and reserves are liabilities. He gives an an example; it seems very certain that central banks will repay most of their very large liabilities /reserves when QE is unwound. And he implicitly assumes that central bank deficits have to be covered by government. (This has in fact happened before when gilts fell in value at the BoE and reserves and notes were no longer at least 100 pct backed by the market value of gilts. The Treasury topped up. )

    4. In normal times, when central banks are controlling interest rates, the “money creation ” of debt monetisation or helicopter money will become neutralised and “the helicopter money disappears ” . . To avoid this, the government would have to lean on the central bank to alter interest rates (to accommodate the change in reserves).
    And in ELB conditions, debt monetisation/helicopter money is no different than QE plus government bond issuance.

    5. The authors’ summary is that ” helicopter money is expansionary fiscal policy financed by central bank money”. And at the ELB, helicopter money” is neither more or less powerful than government spending in combination with QE”.

    So where are we left? These authors views, being the consensus position of those “in charge”, are , I believe, what helicopter enthusiasts have to deal with. And changing either the underlying historic philosophy, economics and practice of central bank and Treasury accounting will not be easy.

    Let’s look at some of the key issues.

    1. Should central banks deal directly in any form with non banks, and specifically with individuals.
    2. Should CBs make transfer payments.
    3. Can CBs run permanently, or temporarily with conventional balance sheet deficits, thereby not fully backing their liabilities with assets.
    4. Will central bankers be willing to buy such things as zero coupon perpetuals or disappearing debt from governments given that such instruments do not provide conventional economic or substantive backing to the notes, coin and reserve issuance of the central bank.
    5. Perhaps most critical of all, and the key point for some HM proponents, can the government run deficit financing without increasing its sovereign debt. And if it believes it can, and the conventional people at the IMF say you can’t, what do you do? Who draws up the UK financial statements?

    So best of luck changing believes and procedures of fiscal and monetary policy, but maybe best not to shoot these messengers who are just setting out the system that currently exists.

    Thinking through how parliament, the Treasury and the CB.

    • Eric Lonergan

      Thanks Denys. Frankly, I think their analysis is very superficial and that the debate has moved on. I only just noticed that this piece looks like a cut-and-paste of a blog they wrote in June. I think central banks are further ahead on this than (most) economists because there have been huge innovations even in the last 12mths. CBs are already doing heli drops, just opaquely and not very effectively.

  5. Denys

    I was just adding that it’s quite hard to see how parliament, the Treasury and the central bank would get changes to current policies into law or practice. Certainly some loss of CB independence would seem to be involved. And if UK started doing monetary financing of its debt the barbs from the EU, Americans and Japanese would be severe, who are fundamentalists when it comes to debt monetisation. Unless of course they changed their thinking too.

  6. Arthur Gaskin

    Are the hyper-links in para 4 broken? Or is the 404 page on accountants a subtle dig?


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