For more than ten years, monetary policy has been extraordinarily accommodating without
achieving its objectives. Faced with this reality, central banks must innovate radically, using the
potential offered by new technologies. This note proposes a new instrument inspired by ‘helicopter
money’ and recent experiments in digital central bank currency: to pay each resident of the
Eurozone between 120 to 140 euros of digital central bank currency, on an account opened for
everyone at the European Central Bank
Edited by Jézabel Couppey-Soubeyran, this note presents a proposal inspired by ‘helicopter money’ and current experiments in central bank digital currencies (CBDC): the ‘drone money’. It consists in paying every resident of the Eurozone between 120 and 140 Euros of CBDC, to a dedicated account at the ECB.
For more than ten years, monetary policy has been extraordinarily accommodating without achieving its objectives. The case of the Euro zone clearly shows this; the many waves of monetary expansion led by the ECB after the 2007-08 crisis have not succeeded in realising the targeted inflation level, nor has it revived economic activity. Faced with this increasingly accepted reality, central banks need to innovate radically by tapping into the potential of technological innovation.
This note presents a proposal inspired by ‘helicopter money’ and current experiments in central bank digital currencies (CBDC): the ‘drone money’. It consists in paying every resident of the Eurozone between 120 and 140 Euros of CBDC, to a dedicated account at the ECB. This form of distribution presents the least operational difficulties, as compared to an issue of digital cash or a direct transfer to the accounts of the beneficiaries. First, the experiment can be conducted over one year, and then continued as long as inflation stays below the two per cent target defined by the ECB. The sum would be distributed on a monthly basis without any prerequisites. Each person would be allowed to spend the money as they see fit. The corresponding central currency required to be issued would be approximately €480M annually, or €40M, to be at scale with the asset purchase programs carried out from 2015.
Freed from the problems of transmission channels that reduce the effectiveness of current monetary policy, ‘drone money’ would lead to an increase in aggregate consumption of at least 70% of the sum distributed and could bring about a multiplier effect of two to three times the amount of central currency issued. Consumption is likely to have a sufficiently direct effect on inflation, making it easier for the ECB to reach its 2 per cent target and in doing so, holding off the risk of deflation. Once the target is achieved, the distribution would stop. Compared to the unevenly distributed effects of the current monetary policy, those of the drone would benefit everyone; this would be a great breakthrough and would strengthen the legitimacy of the ECB.
The cost of this operation would be financed entirely by the central bank and would not cost taxpayer’s money. However, it would imply a collective acceptance of the resulting balance sheet loss for the central bank. This is easily affordable and would not in any way hinder its activities.
Many objections have been raised to the proposal of helicopter money. To those challenging it, helicopter money should be closer to fiscal policy than monetary. It would encourage more consumption than investment without having any sustainable effect on growth. It would be mostly saved and should be set aside for specific policies targeting the poorest households. Additionally, it would also be inflationary, anti-ecological and a waste of money in an open economy, and so on. The note offers an overview of these counterarguments and responds to them.
The proposed instrument is a monetary one; it is not looking to replace budgetary action, the latter being the only way to stimulate directly productive investment. There is no need for this instrument to target low-income households for the purpose of efficiency - that is beyond the scope of the ECB. It would be enough to do them no harm! Of course, the drone’s effects will directly impact consumption, but by actively supporting demand it ultimately supports investment, without having to introduce other monetary measures aiming at lowering long term interest rates, such as asset purchases, to facilitate investment financing. Even if we assume that a third of the sum distributed would not be spent, that is well beyond the 13.3% average gross saving rate of the Eurozone, the stimulus generated would far exceed that of current monetary policy. There is no need to force or guide the expenditure with special purpose money or vouchers, especially because it will not prevent households from adjusting their savings from other sources of income. Moreover, this kind of financial paternalism will not help in restoring confidence. On the other hand, nothing would prevent envisioning a transfer of ‘demurrage’ (or ‘melting’) CBDC to prevent it from being saved. The drone would accelerate inflation and that is a good thing. Of course, such acceleration needs to be controlled, indexing the amount transferred to inflation can be a way to do it. This support to consumption will not hinder the ecological transition but will facilitate it instead, as it will make its economic effects more bearable for the lower classes. Taking inequalities into account must be the starting point for desirable and desired environmental policies.
At the end of her first Governing Council meeting on 12th December 2019, Christine Lagarde declared herself to be “neither a dove nor a hawk” but an “owl” for the wisdom that it embodies. The drone is an “owl” innovation, neither “dove” (since it would allow us to achieve the inflation target), nor “hawk” (since it would have a strong effect on growth), deserving consideration. This high-tech version of helicopter money would reconcile the central bank’s need for technological adaptation and the necessity to put monetary policy back to the service of everyone. Of course, it does not exempt the ECB from reflecting on the effects of its polices. Because, even in a more efficient form, monetary policy will not be able to do everything!