Market Overview

Last week I wrote about how these measures of monetary and fiscal expansion would perhaps be nothing more than survival actions with little added value and economic stimulus. On the demand side, people now have a less active life and with the uncertainty about the future they end up consuming less; while on the supply side, regardless of how low interest rates really are, companies with solvency problems or lack of liquidity would probably always go into debt in order to pay salaries.

There is, however, a better way to possibly mitigate the negative effects of these measures. Helicopter Money refers to the injection of capital into the economy directly into the pockets of economic agents. This would increase disposable income, and consequently, lead to higher demand and lower corporate borrowing requirements. Ben Bernanke called it a cash-funded fiscal program (2016). The reason behind this, is because Helicopter Money can be thought of as a fiscal expansion. The central bank would buy government bonds in open market operations and the state would cut taxes by the same amount.

Olivier Blanchard (2019), former chief economist of the IMF, mentions two possible ways for this to happen:

- Indirect : Treasury bonds would be issued by a state and would later be purchased by the central bank. The debt is from the government to the central bank. The central bank sees an increase in its liabilities (amount of money) as well as in its assets (treasury bonds) with its net equal;

- Direct: Central Bank transfers money directly to families. There is no debt from the government to the central bank. There is an increase in liabilities (amount of money) without an increase in assets, and the net position decreases.

However, there are disadvantages in each scenario. In the first, the decrease in the central bank's net capital position is not in the interest of central banks. It makes them look badly managed and jeopardizes their independence. In the indirect method, the government has the incentive to increase taxes since there is an increase in its debt. That way, consumers may be more willing to spend that money directly.

Then there are also barriers to its implementation. Helicopter Money turns out to be a way of circumventing fiscal consolidation rules and certainly some European countries would not be very open for this to happen. In addition, more practical questions would also need to be answered: Who would provide households with information to central banks? Who receives that amount, each individual or the household? Would you need parliamentary approval? Does the ECB have the capacity to do so? Would all countries receive the same amount?

In Europe, political decisions already take their time to be taken, and a policy of this magnitude would be highly complicated to implement. However, it would certainly help to mitigate the negative effects of this pandemic in a more efficient way than any other measure. Also a few months ago, I was writing about the possibility of observing Helicopter Money in the Eurozone, saying that only in the face of a major crisis would it be possible to see this measure in action. Unfortunately, that situation has arrived and it will be interesting to see if the conservative European politicians will be able to set a precedent never seen before.

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