QE is not helicopter money – and yet it is useful
In response to the current economic crisis, central banks have embarked on operations to purchase huge quantities of government bonds. Accusations that these policies amount to ‘printing money’ or ‘helicopter drops’ are unfounded and misleading. This column argues that the asset purchase operations undertaken when interest rates are very low can help greatly in stabilising the economy. These actions allow governments to issue long-term bonds, incur low effective costs in the near horizon, and avoid volatile financial markets.
The scale of extra government spending needed to prevent the current economic crisis from doing lasting harm is enormous (Baldwin and Weder di Mauro 2020). Public sector liabilities will rise greatly, as they did for many countries after the Napoleonic wars, WWI, and WWII. Those liabilities relative to our national income can come down again after we get through this crisis – just as they did after those huge wars in the 19th and 20th centuries.
But it would not be surprising if there were difficulties for bond markets to digest the scale of government debt issuance needed in a short period to fund such extra spending. It would then be entirely appropriate for the central bank to massively expand its purchases of government bonds to allow the necessary fiscal response and avoid bond market turmoil. It is in this light that one should view recent central bank decisions – by the Bank of England, the ECB, and the Fed – to undertake asset purchases and on a scale not seen before.
The Bank of England has announced a £200 billion expansion of asset purchases, and it may well do more. To describe this sort of operation as a ‘helicopter drop’ of money is misleading, as are comparisons with Zimbabwean-style money printing that induced huge inflation. The main reason is that central bank purchases of government bonds are not the equivalent of the central bank printing notes and handing them out. Asset purchases by the central bank are financed by money creation, but not money in the form of bank notes. The money is in the form of reserves held at the central bank. That form of money is a liability of the public sector – taking the central bank and the government together in an expanded definition of the public sector. It is a liability that pays the interest rate set by the central bank. That rate right now in the UK is essentially zero (or 0.1%). But it will not stay there forever. In contrast, bank notes never pay interest.
The case for helicopter drops in the extraordinary circumstances of the current crisis have been made by first-rate economists who understand that quantitative easing (QE) operations are not helicopter drops. Jordi Galí, for example, is admirably clear in his recent VoxEU piece (Galí 2020) He argues that such operations constitute direct and unrepayable funding by the central bank of government transfers. There may be situations where they are warranted, though I am sceptical whether they hold today. Either way, my point is that this is not what the Bank of England operation is and that it may nonetheless be very effective.
The current asset purchases by the Bank of England let the government fund parts of its spending at a rate that is effectively zero today. It matters less than people think whether such central bank purchases are of existing debt already held by investors or whether they are direct purchases of new debt issued by the government. If the Bank of England buys 15-year debt issued by the UK government five years ago that is much the same as buying a newly issued ten-year bond. In both cases, the amount of government debt with ten years left held by private investors is the same. To put the point even more starkly, there is not much difference between the Bank of England buying a ten-year bond directly from the government on Monday or waiting until Tuesday to buy it from a pension fund that held it overnight.
If new asset purchases by the central bank match extra spending by the government in the crisis, then the interest cost of that spending is initially zero. As the economy recovers, the appropriate rate set by the central bank will eventually move up. Assuming that the mandate of the central bank continues to focus on inflation targeting, then interest rates will, at some point, gradually move to stop inflation from moving above the target. The time when that becomes appropriate is likely to be quite far off. It will become closer the faster the economy returns to something more normal. The fact that the effective cost of the extra government public sector liabilities will gradually move up from zero in line with the recovery of the economy is a natural and helpful stabilising mechanism.
Overall, we should view large-scale central bank purchases as a stabilising mechanism. They allow the government to avoid financing huge fiscal expansions by making enormous net issues of longer-dated debt absorbed by private investors in a volatile bond market. They also mean that the government does not have to issue huge quantities of short debt and keep rolling it over. QE is a stabilising operation in a world hit by a huge shock that people are struggling to understand. Talk of helicopter drops of bank notes is unhelpful and comparisons with Zimbabwe are outlandish.
Baldwin, R and B Weder di Mauro (eds) (2020), Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, a VoxEU.org eBook, CEPR Press.
Galí, J (2020), “Helicopter money: The time is now”, in R Baldwin and B Weder di Mauro (eds), Mitigating the COVID economic crisis: Act fast and do whatever it takes, a VoxEU.org eBook, CEPR Press.