...against fictions and other tall tales

Saturday, 23 February 2013

Helicopter money: an operational view

Much has been written about Adair's Turner suggestion that central banks should consider financing public spending but I thought this short exchange between Adair Turner and economist Mario Seccareccia at an INET conference in 2011 is worth pointing out.

Here's Adair Turner's question:
[About Japan]...why wouldn't it been better still to do what Friedman said was the correct policy post facto in the 1930s, which is "helicopter money". Why wouldn't a better policy had been for the Japanese government to simply run fully, overtly, monetized deficits so that the last [inaudible] percent of GDP was not in the form of a debt contract held by the Japanese private sector but was in the form of absolute, categoric fiat money? (at 2:30 here)
This is Mario Seccareccia's response:
[About the] issue which had been raised about fiscal policy and the "helicopter drop" [vs conventional deficit spending]. That's a false dichotomy. I mean, deficit spending is -- in a sense -- monetization all the time. [Bond issuance is] how the central bank then behaves to clear or sterilize -- so to speak -- those reserves in the system in order to meet its interest rate policy. Period. There is no such thing as a "helicopter" doing this. It's always done through deficit spending fundamentally, I would argue. (at 9:00 here)
The point to remember when thinking about a central bank's ability to inject exogenous increases in reserve balances is that in a monetary regime such as Japan (and the UK for that matter) where the central bank targets an interest rate and the remuneration rate on reserves balances isn't set at the same level as its target interest rate, the central bank can't conduct offensive open market operations aimed at increasing the amount of reserve balances without simultaneously frustrating its goal of keeping its benchmark interest rate on target. Under such a regime the central bank's ability to control money growth is essentially limited to conducting defensive open market operations aimed at keeping its interest rate on target.

UPDATE: A very detailed look at the "helicopter drop" issue is found in Scott Fullwiler's article "Helicopter drops are fiscal operations" (2010). For a general discussion on offensive vs defensive open market operations, see Lombra, Herendeen and Torto, Money and the Financial System, page 425, 1980.


  1. Thanks for the link Circuit. I had Mario as a professor a few years ago. Just curious, did you also attend the University of Ottawa?

    1. I studied at McGill but am familiar with the work of profs at Ottawa U. Mario's work is a very good.

    2. I however do attend U of Ottawa and am a research assistant for Marc and Mario. if you're still around, I'd love to hang out with others in this circle.

      What this post forgets to point out that is that the central bank can do offensive open market operations when injecting reserves if it's policy rate is equal to the interest on excess reserves.

    3. Nathan, it's great that you're assisting Marc and Mario in their research. Thanks for the additional info. I thought I captured it in the first sentence of the last paragraph but it's good to emphasize it. I'd be glad to meet--I know where to find you.

    4. sh*t i just noticed that sentence imbedded in the paragraph. somehow i missed it on first reading. sorry about that.

    5. No worries ;) -- Yes, I'm in Ottawa.

  2. my email is nathantankus@gmail.com

    shoot me an email sometime and we can meet up.