MNI POLICY: Canada Doesn't Need Helicopter Money -CD Howe

The Bank of Canada should avoid helicopter money even as a last resort because sending cash directly to households would harm its independence and add little extra stimulus, former central bank researchers wrote in a new paper Thursday.

Even with the BOC rejecting further reductions to its record low 0.25% policy interest rate, other measures such as QE and forward guidance are offering support, Thorsten Koeppl and Jeremy Kronick wrote for the CD Howe Institute of Toronto, which runs a shadow monetary council. Koeppl has helped advise the BOC and Kronick was a former researcher there.

While the BOC could envision sending money directly from its balance sheet to household bank accounts, or financing government debt to do the same thing, it would need legislation ensuring control over the policy's use to meet its inflation target. Use of helicopter money comes fraught with political danger even with safeguards including a proper exit strategy, they wrote in the paper.

"'Going direct' would open the door to political interference with monetary policy, even under a well-designed system," Koeppl and Kronick wrote.

There is a greater need for new policies with the benchmark interest rate likely now in a normal range of 1% to 2%, and other moves like QE and negative rates also carry risks, the authors said. That can make it harder through an economic cycle to meet an inflation target.

"Inflation control is one of the biggest achievements of economic policy in Canada over the past quarter century. The general public understands the job of the Bank of Canada. That might change fundamentally, however, if people receive a check in the mail from the government that they know has been enabled solely by the Bank of Canada's balance sheet magic."

There is almost no evidence the BOC or the government wants helicopter money, and the economy has likely passed the worst part of the Covid lockdown with more targeted relief checks. Former Governor Stephen Poloz panned Modern Monetary theory in a speech in the last year, and while some ministers faced questions about universal basic income, nothing has been said about any concrete plans, much less roping in the central bank.