mercoledì 28 ottobre 2015

Helicopter Money (or something similar to it) for the Eurozone

By Biagio Bossone, Marco Cattaneo, Enrico Grazzini, Stefano Sylos Labini

What can Italy and the Eurozone crisis-countries do to fight persistent deflationary tendencies, in the face of the ECB failing to reach its 2% inflation target through QE? ECB president Mario Draghi has announced that the institution is willing to extend and expand its QE program. But is this the most effective solution?

Bernanke, Friedman, Keynes and helicopter money

In 2002, in a now famous speech before the National Economists Club in Washington, former US Fed chairman Ben Bernanke, speaking about stagnation in Japan, recommended that “A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. ... A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money”.

Milton Friedman, in fact, was not the only economist who thought about pouring money from helicopters out to people in the streets as the most effective stimulant to a depressed economy. Keynes himself had written as much provocatively on the subject, suggesting that in the absence of other measures it would be socially useful for the public authority to bury bottles filled with banknotes and let individuals unearth them, thus increasing incomes and jobs via the multiplier effect. Similar forms of monetary cum fiscal stimulus – which HM is all about – were thereafter recommended by as diverse and well-known economists like Henry Simon, Irving Fisher and Abba Lerner.

Eventually, the best that Bernanke (and his colleagues from the major central banks) was able to come up with was QE. Yet QE is not HM. Unlike HM, the money coming from QE may be issued only in exchange for other assets: it works indirectly through price effects, and does not add new spending power to the economy. Also, the money from QE gets into the economy through banks and financial intermediaries, which can only on-lend it to those few firms and households that during a depression are willing to borrow and are creditworthy enough. Finally, unlike HM, the money from QE goes to well-off individuals who are typically less inclined to spend than those relatively less well off.

In the Eurozone, the ECB has so far pumped billions of QE money into the banking systems, but little of it has gone into new lending at more favorable terms to borrowers.

The inadequacy of QE has eventually gained new adepts to HM as a more effective tool. In the UK, the idea has gained traction on the political left with the proposal for a QE for the people, or QEP, by Jeremy Corbyn, the new leader of the British Labour Party, according to which the central bank would print money and purchase bonds issued by a to-be-established National Investment Bank, which in turn would use the money to fund public infrastructure projects. Under Corbyn’s proposal the state would direct most of the new monetary stimulus.

Fiscal money

In Italy and the Eurozone countries, where monetary and fiscal rules would prohibit the use of HM, we think it is possible to conceive of a policy instrument that is similar in spirit to HM while being compliant with existing rules.  We call it Tax Credit Certificates (TCC). TCC are issued by the government and entitle their holders to tax rebates equivalent to TCC face value; holders may exercise their right after two years from TCC issuance. TCC do not involve a government commitment to repay some future debt; they commit the government to accept redeemable TCC in exchange for tax reductions.

The government assigns TCC (free of charge) to households and enterprises, and uses them also for certain payments to the public administration. Like government bonds, TCC trade in the financial market. Their discount is close to that on a two-year zero-coupon government bond. TCC sellers are households and enterprises that need immediate liquidity; buyers are households, enterprises and any other subjects who want to use them to save on taxes.

TCC are allocated to households in inverse proportion to their income, both for social equity purposes and to incentivize consumption decisions. To maximize their impact on demand, TCC could be provided to households through a special fiscal card under a ‘spend it, or lose it’ constraint, forcing cardholders to spend their allocations within, say, a year, or face their cancellation. TCC allocations to enterprises are proportional to their labor costs, and act as labor-cost cutting devices, immediately improving their competitiveness. Greater export and import substitution following cost and price reductions not only create more output and employment, but also offset the impact of increased demand on the external trade balance. A portion of TCC issuances can be used to support public utility infrastructure initiatives as well as social welfare programs.

TCC issuances are calibrated to close the ‘output gap’ caused by the crisis. In the case of Italy, they could start from a level of 5% of annual GDP, increase gradually up to 10%, and then be modulated so as to ensure high levels of employment consistently with domestic (inflation) and external (trade) balance.

Thanks to the income multiplier, which is particularly high in the case of large resource underemployment, the expansion of GDP over the two years before TCC redemptions generates new fiscal revenues sufficient to cover the budgetary impact of redemptions. Our estimates [“per-una-moneta-fiscale-gratuita-come-uscire-dallausterita-senza-spaccare-leuro”-online-il-nuovo-ebook-gratuito-di-micromega/] suggest that a multiplier of 0.8 would suffice to ensure fiscal sustainability of the TCC maneuver, meaning that it would not impact the deficit/GDP ratio.

TCC issuances can be decided autonomously and democratically by national parliaments and governments, without requiring prior consent from European institutions. In fact, since TCC do not create debt and are denominated in euro, they fully comply with European rules.


The TCC program stands as a Keynesian type of intervention, centered on the preference for fiscal policy as a cure to ‘liquidity trap’ diseases, while it draws from HM the principle of ​injecting new purchasing into the economy.

Italy and the Eurozone crisis countries can and must recover using their own strength, without demanding that most competitive countries, like Germany, come in their help.

The TCC program can help governments revamp their economies, while not endangering financial stability and external balance.

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