The future role of (un)conventional unconventional monetary policy

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Question 1: Do you agree that central banks should continue to use the unconventional tools of monetary policy deployed in response to the global financial crisis as part of monetary policy under normal economic conditions?

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Question 2:  Do you agree that central banks should operationalise the use of these alternative tools of unconventional monetary policy for use either in the near term, or in the future, as economic conditions warrant?

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Summary

The April 2016 Centre for Macroeconomics survey of experts asked for the panel’s views on the future role of unconventional monetary policy. Opinions were divided, with healthy doses of scepticism on the effectiveness of current and future policies, but also many respondents expressing urgency that central banks should have more policy tools to affect inflation and real activity when the need arises. Ultimately, the experts’ hesitations match those of central banks.

Background

The Bank of England’s Monetary Policy Committee (MPC) last changed interest rates in March 2009 when the official interest rate was lowered to 0.5% and has stayed there since then (which suggests that this may be the perceived effective lower bound on nominal interest rates). At the same time, the Bank of England began to make purchases of financial assets direct from the non-bank financial sector. It began with £200bn of asset purchases, mostly UK government debt, between March 2009 and November 2009. The MPC then increased the stock of asset purchases to £375bn in three increments (£75bn in October 2011; £50bn in February 2012; and £50bn in July 2012). While there have been no further purchases of assets for over three and a half years, the returns and proceeds on maturing bonds have been reinvested, which means that the outstanding portfolio of purchased assets is £375bn. 
 
This form of monetary policy, know as quantitative easing (QE), was unconventional because it consisted of large purchases of government bonds of long maturities funded by interest-paying reserves. Textbook conventional open market operations instead consist of purchases of short-term bonds in small quantities, paid for by currency or non-interest paying reserves. Moreover, QE purchases of long-maturity assets are executed for reasons other than the implementation of a decision to change the (short-term) policy rate. Similar unconventional policies have been adopted by other central banks at times over the last seven years, although other central banks went further by also buying many other non-government issued securities and/or lending against a broad set of collateral for long periods of time. Such forms of unconventional monetary policy have become so common that they have been called ‘conventional unconventional monetary policy’.
 
There has been active research on the effects of QE policies. Most work finds that QE increases the prices of the assets that are bought, lowers long-term interest rates, and decreases expectations of future short-term interest rates. The effect of these policies on inflation and real outcomes are more disputed, as are their effects on financial stability.

Unconventional monetary policy in ‘normal’ times

There is disagreement about the current strength (or weakness) of economic conditions in the UK and elsewhere, and therefore on the desirability of further monetary stimulus. The first question asked the experts to set aside their views as to whether the current state of the economy warrants the use of further unconventional policies, and asked them to consider whether these unconventional policies should become part of the conventional tools of monetary policy under ‘normal’ economic conditions.

Question 1. Do you agree that central banks should continue to use the unconventional tools of monetary policy deployed in response to the global financial crisis as part of conventional monetary policy under normal economic conditions?

Thirty-six of the panel answered this question, and they are close to being evenly divided in their assessments: 47% agree, while 41% disagree, with the remainder in between. There is also a match at the extremes, with only the slightest advantage to those that agree strongly, 14%, versus those that disagree strongly, 8%.

On the side of those that are suspicious of unconventional policies in normal times, four arguments stand out. The first is that using conventional interest rate setting is more effective, and less prone to error. As Sir Charles Bean (LSE) puts it, ‘the conventional short-term policy rate should be the preferred monetary policy instrument once the policy rate is clear of its floor (i.e. in ‘normal’ times). That is because there is less uncertainty around the impact on the economy of variations in the policy rate than there is surrounding the impact of asset purchases.’ Panicos Demetriades (Leicester) agrees: ‘Unconventional monetary policies are intended to be used when conventional policy has reached its limits, when interest rates have reached the zero lower bound and negative interest rates cannot be relied upon. They have too many side effects, some of which are not well understood, to become part of conventional monetary policy.’

The second argument is that unconventional policies don’t work well. As Michael Wickens (Cardiff Business School and University of York) states, ‘Even in the current abnormal conditions, unconventional monetary policy has proved ineffective in stimulating private credit expansion.’

A third argument worries that using unconventional policies makes it hard to be transparent and to pursue clear rules. Morten Ravn (UCL) says ‘Using also unconventional policies would be a return to the fine-tuning policies of the past which was no big success to put it mildly. Moreover, it would make central bank communication very challenging and most likely be costly in terms of reputation.’

The fourth argument notes that unconventional policies are quasi-fiscal operations that can lead to losses and danger to the central bank's independence, as Martin Ellison (Oxford) notes: ‘QE exposes the central bank to making capital losses and gains that ultimately have to be underwritten by the Treasury.’ 

On the side of those that are in favour of using unconventional policies in normal times, Ray Barrell (Brunel) argues that: ‘Monetary policy has normally operated at the short end of the yield curve, whilst the long end is probably more important for both wealth effects and investment decisions… Central banks should look at the situation they find themselves in and operate where it is most appropriate.’ Sir Christopher Pissarides (LSE) agrees: ‘Monetary policy is not easy and the more tools that the central bank uses the more effective its policy will be’. 

Ricardo Reis (LSE) argues that these policies are really not all that unconventional: ‘The central bank's balance sheet has ‘always’ been a policy tool, especially in open economies where central banks hold foreign reserves... The use of QE and other unconventional tools in the recent past has just made us study these issues better, learn more about their effects, and so become more confident about using them in the present and in the future.’

Helicopter money and other ‘unconventional unconventional policies’

Some economists have expressed concerns that there are economic conditions under which existing tools, including unconventional monetary policy tools, are not sufficient to achieve central bank objectives. In fact, some have argued that current conditions warrant more innovative tools being introduced. These ‘unconventional unconventional policies’ include the financing of public spending (or tax cuts) through printing money – the idea that was called ‘helicopter money’ by Milton Friedman. These policies also include abolishing currency and setting substantially negative nominal interest rates. Others feel that even if current tools may be enough for now, it is necessary to undertake a more radical rethink of the tools of monetary policy to ensure that the central bank is ready to deal with future crises as they arise. 
 
Against further expansion of the tools of monetary policy, some argue that QE, if continued and expanded, is enough. Further increasing the size of the central bank balance sheet or making this set of tools more permanent leaves enough room for the Bank of England to intervene further. Moreover, they argue that the changes to the current monetary policy arrangements necessitated by the adoption of these tools are too uncertain and/or too costly (for example, giving up hard-earned monetary independence and credibility, or radically changing the payment systems in society). 
 
The second question asked the experts whether they believe that the central bank toolkit needs further new tools to become potential instruments of monetary policy (again ignoring whether they believe current conditions necessitate such instruments). In the context of this question, operationalising the tools means that the central bank takes whatever steps are necessary to add the instrument to their menu of possible policy options, even if no immediate use of the policies is made. New policies whose first objective is financial stability were not be considered in this question.
 
Question 2: Do you agree that central banks should operationalise the use of these alternative tools of unconventional monetary policy for use either in the near term, or in the future, as economic conditions warrant?

The experts are weakly in favour of these alternatives, as slightly more than half agree, with only 36% disagreeing. But it is those who disagree that are more vocal in their opinions, justifying them at greater length. 

Ethan Ilzetzki (LSE) thinks that these tools, and especially helicopter money, are clearly fiscal operations: ‘I support the use of fiscal policy as a countercyclical tool, but do believe this should remain within the remit of the Treasury. Helicopter money may be a way to exploit the Bank of England's independence to circumvent the political process, but I think this would be unwise.’ Kate Barker (Credit Suisse) makes a similar point.

David Miles (Imperial College) sees helicopter money as being likely to have no effect: ‘If the question is asking about helicopter drops I do not agree that they are likely to be a useful tool... Distributing newly printed bank notes in exchange for government debt would, in fact, almost immediately be turned back into reserves. If reserves pay interest – as they do now and as I think they should – then ‘printing money’ is just financing government spending by the government borrowing at Bank Rate, something it can do anyway by issuing Treasury Bills.’

More generally, Wouter Den Haan (LSE) is sceptical that it is better to have more instruments: ‘It is not clear to me that achieving central banks’ objectives will become more manageable with these quite revolutionary instruments. In fact, steering a ship in a storm may become more difficult when the captain has many controls and it becomes more difficult for the ship’s sailors and other ships to understand what is going to happen.’ Michael McMahon (Warwick) concludes that while these alternative policies should be studied, they are not ready to be implemented: ‘It is clear that central banks should be thinking about the practicalities of a number of alternative tools for possible future use, but I think I fall short of fully advocating their operationalisation at the moment.’

Of those that agree that central banks should operationalise alternative tools, Nicholas Oulton (LSE) thinks that these policies are already been in place, just in disguise: ‘In the UK case we have in effect already operationalised the use of helicopter money since the period of active QE coincided with a large budget deficit.’ Simon Wren Lewis (Oxford) agrees that the policies are fiscal, but sees this as a virtue: ‘One of the undesirable side effects of central bank independence is that governments are no longer able to undertake a money financed fiscal stimulus in a deep recession. Governments and central banks need to put that right by one means or another.’

Finally, Angus Armstrong (NIESR) provides a precautionary defence of these policies: ‘From a risk management perspective it would be prudent to operationalise alternative tools at least for the near term. In fact, one could regard it as negligent if alternative tools were not operationalised given the extraordinary economic conditions and failures in forecasting.’

References:

Joyce, M.A.S. and Tong M. (2012) ‘QE and the Gilt Market: A Disaggregated Analysis’, Economic Journal 122(564): F348-84.

Gagnon, J., Raskin, M., Remache, J., and Sack, B. (2011) ‘The Financial Market Effects of the Federal Reserve’s Large-Scale Asset Purchases’, International Journal of Central Banking 7(1): 3-43.

Krishnamurthy, A., and Vissing-Jorgensen, A. (2011), ‘The Effects of Quantitative Easing on Long-term Interest Rates’, Brookings Papers on Economic Activity Fall 2011: 215-65.

Rogers, J. H., Scotti, C. and Wright, J.H. (2014) ‘Evaluating Asset-market Effects of Unconventional Monetary Policy: A Multi-country Review’, Economic Policy 29 (80).

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How the experts responded

"Conventional" unconventional monetary policy

Participant Answer Confidence level Comment
Gianluca Benigno London School of Economics Neither agree nor disagree Not confident
as long as these unconventional policies are useful in achieving Central Banks' target (i.e. inflation), they could be used even in normal times even though it is not clear to me to what extent in normal time there is more substitutability between conventional and unconventional monetary policy tools.
John VanReenen London School of Economics Agree Confident
Silvana Tenreyro London School of Economics Agree Confident
A wider set of policy tools would give mature and credible central banks like the BoE more flexibility to respond to changing economic conditions.
Andrew Scott London Business School Agree Confident
Nicholas Oulton London School of Economics Strongly agree Extremely confident
Since we are likely to be near the zero lower bound for some considerable time, it obviously makes sense to retain the option of more QE, if and when needed.
Ray Barrell Brunel University London Agree Extremely confident
Monetary policy has normally operated at the short end of the yield curve, whilst the long end is probably more important for both wealth effects and investment decisions. There is a strong case for operating in the commercial paper market as well as the government market as effects may be more directly felt. Stimulating or constraining the economy by operating only at the short end is particularly effective in financial markets where many individuals and firms are liquidity constrained, and this may be less common now than it was in the 1950s. Changing financial constraints, wealth evaluations and investment decisions are all reasonable parts of a central banks' toolkit in normal times. The long end has become more important in the recent period of very low short rates. Central banks should look at the situation they find themselves in and operate where it is most appropriate. Of course such actions should be two sided, so that accumulations of assets should eventually be run down.
Richard Portes London Business School and CEPR Strongly agree Extremely confident
Charles Nolan University of Glasgow Disagree Very confident
Andrew Mountford Royal Holloway Agree Confident
David Smith Sunday Times Disagree Confident
Unconventional monetary policy is an appropriate response to a shock, as in 2009, but much less appropriate in normal economic conditions. Disappointing growth, which prompted the UK's second round of quantitative easing, was not in my view a strong enough reason. Though the evidence is mixed, I also suspect that QE was subject to diminishing returns.
Richard Dennis University of Glasgow Disagree Confident
Ricardo Reis London School of Economics and Columbia University Strongly agree Very confident
The central bank's balance sheet has *always* been a policy tool, especially in open economies where central banks hold foreign reserves. Moreover, even when a central bank chooses interest rates, this is only effective insofar as it is backed by the central bank's ability and willingness to issue reserves, and it partly depends on the assets bought with those reserves. Finally, we know from the monetary transmission mechanism that even setting interest rates affects different financial prices and markets differently, and we rely on this to affect economic activity. The use of QE and other unconventional tools in the recent past has just made us study these issues better, learn more about their effects, and so become more confident about using them in the present and in the future. See http://www.columbia.edu/~rr2572/papers/15-QEfuture.pdf or https://ideas.repec.org/a/aea/jecper/v27y2013i4p17-44.html
Wouter Den Haan London School of Economics Neither agree nor disagree Confident
I can imagine that there are situations under which it would make sense to use unconventional monetary policy under "normal" circumstances. For example, if the yield curve is quite steep and forward rates are inconsistent with the central bank's expectations. But there is a lot of value in monetary policy being transparent and predictable and this is easier if monetary policy is not too complicated.
Martin Ellison University of Oxford Disagree Confident
There are at least two arguments for why it would be prudent to hold back from using QE in normal times. Firstly, conventional monetary policy is better understood and subject to significantly lower levels of uncertainty and ambiguity. Secondly, QE exposes the central bank to making capital losses and gains that ultimately have to be underwritten by the Treasury. Whilst this does not matter in the consolidated government balance sheet, it could undermine the independence of the central bank at a time when their credibility is not particularly high. Would the central bank have to ask permission from the Treasury to carry out QE actions that would technically leave it insolvent? Would it get permission if it did? Such political economy constraints could erode hard-fought central bank independence.
Jan Eeckhout University College London Neither agree nor disagree Confident
Jagjit Chadha National Institute of Economic and Social Research Neither agree nor disagree Confident
Although similar in spirit because they affect market rates and liquidity, QE is different from standard open market operations or from any underfunding of public debt sales because of the longer maturity of bonds bought, the size of the expansion in the balance sheet and the duration of the holdings. It would be rather unusual to run up such large stocks of debt in normal times, whatever normal may be, unless the central bank lost control of its ability to influence the term structure or if changes in the overall demand for liquidity require some form of QE. So my central view is that it depends!
Alan Sutherland University of St. Andrews Disagree Confident
David Miles Imperial College Disagree Confident
I think in ordinary circumstances using variations in the policy rate (Bank Rate in the UK) is by far the most effective tool of monetary policy; buying and selling government bonds when financial markets are operating normally is not likely to have a very significant affect. (In those circumstances the conditions that Eggertson and Woodford assumed in a Brookings Paper of several years ago come close to being satisfied and mean that QE is then a weak tool).
Sir Charles Bean London School of Economics Strongly disagree Very confident
While large-scale asset purchases (QE) should remain part of the central bank's armoury when policy rates are constrained to the downside, the conventional short-term policy rate should be the preferred monetary policy instrument once the policy rate is clear of its floor (i.e. in 'normal' times). That is because there is less uncertainty around the impact on the economy of variations in the policy rate than there is surrounding the impact of asset purchases. Asset purchases also involve taking on risks to the consolidated public sector balance sheet (especially if the central bank acquires private assets such as mortgage-backed securities, corporate debt or equities) and thus take the central bank into quasi-fiscal territory. So they should only be deployed in extremis.
Ethan Ilzetzki London School of Economics Disagree Very confident
I would respond with the question "to what end?". I believe that unconventional monetary policy has the ability to affect asset prices and the slope of the yield curve. Continuing to use these tools when the central bank has its traditional tool--the short term rate--at its disposal means that the central bank would then have multiple policy instruments. Given that the Bank of England has a sole policy objective--an inflation target--it's not clear why it needs more than one instrument and this seems like unnecessary intervention in the workings of financial markets. To be persuaded that these tools should still be active in normal times, I'd want to understand why their proponents believe that they will increase the ability of the central bank to stabilise prices. Alternatively, I'd like to understand what secondary objectives these additional instruments would be targeting.
Sir Christopher... London School of Economics Strongly agree Extremely confident
Monetary policy is not easy and the more tools that the central bank uses the more effective its policy will be. For example, there might be times in normal economic conditions when the central bank might want to reduce long rates without affecting short rates. Unconventional monetary measures are the most effective tools for this kind of action
Simon Wren-Lewis University of Oxford Strongly disagree Very confident
I assume by 'normal times' you mean that short rates are not at or near their lower bound. In which case you have one instrument, nominal short rates, which dominate the other (QE) in terms of predictability and effectiveness. There is therefore no reason to use the inferior instrument.
David Cobham Heriot Watt University Agree Confident
Yes, QE could be useful and could be held in reserve for the future. But it is only really necessary, at least in most situations, if and when the use of fiscal policy has been ruled out - for example, by the disfunctionality of the political system as in the US, or by political ideology as in the UK and the Eurozone.
Kate Barker British Coal Staff Superannuation Scheme Agree Confident
Akos Valentinyi University of Manchester Strongly disagree Very confident
Paul De Grauwe London School of Economics Agree Confident
Jim Malley University of Glasgow Agree Confident
Michael Wickens Cardiff Business School & University of York Disagree Very confident
Even in the current abnormal conditions, uncoventional monetary policy has proved ineffective in stimulating private credit expansion. There is no reason to expect they would be more effective in normal times when in theory they would be unnecessary. To make matters worse UMP has distorted asset prices causing considerable asset market rebalancing and volatility. Although there is no good case for UMP, there is a good argument for using the new non-monetary tools to achieve financial stability, especially to prevent insolvency and banking excesses.
Morten Ravn University College London Disagree Confident
Under normal conditions, monetary policy should be aimed at addressing the inefficiencies that arise due to the existence of nominal rigidities of various sorts. Conventional policies should be the appropriate tools for this purpose. Using also unconventional policies would be a return to the fine-tuning policies of the past which was no big success to put it mildly. Moreover, it would make central bank communication very challenging and most likely be costly in terms of reputation. The one complication that I am not sure about is that there will be implications for monetary AND fiscal policy of the introduction of macro prudential policies. Exactly how this will play out is unclear to me but I can't see a clear reason for why it should pave the way for the use of unconventional policies in normal times.
Francesco Caselli London School of Economics Agree Confident
Angus Armstrong National Institute of Economic and Social Research Disagree Confident
Conventional monetary policy decisions benefit from being protected from political influence. Unconventional monetary policy is inextricably linked to fiscal policy through fiscal projections conditioned on interest rate expectations (derived from the yield curve which QE can influence) and fiscal transfers from interest earned above the APF loan rate. While there are parallels with conventional policy, the amounts involved are a different order of magnitude. In ordinary economic conditions the economy is fairly sensitive to short term rates due to the dependence on bank finance.
Michael McMahon University of Oxford Agree Confident
Monetary policy is a blunt tool. Asset purchases as used in the financial crisis allow central banks to be a little bit more targeted especially as the central bank also worries about macro-prudential policies (and we are still uncertain over the interactions and trade-offs in using different monetary and macro-pru tools). These conventional unconventional tools do not have to be the focus of monetary policy actions in more normal times. The expansion of central bank balance sheets has not lead to runaway inflation / inflation expectations (yet!). And since central banks still hold these existing large stocks of these assets on their balance sheets, they could quite easily be bought or sold in any operations.
Panicos Demetriades University of Leicester Disagree Extremely confident
Unconventional monetary policies are intended to be used when conventional,policy has reached its limits, when interest rates have reached the zero lower bound and negative interest rates cannot be relied upon. They have too many side effects, some of which are not well understood, to become part of conventional monetary policy. For example, they tend to transfer wealth to asset holders, by raising the value of financial assets, and transfer risk from the private sector to the public sector, which can create added moral hazard. They also increase the size of central bank balance sheets and when they unraveled can create losses which may need to be covered by the taxpayer. If such a situation arises and the central bank needs to be recapitalised by its respective government, central bank independence is likely to be threatened and possibly jeopardised. Moreover, the more they are used, the greater the risks as their scope may need to be extended to cover riskier and riskier assets.
Joseph Pearlman City University London Strongly agree Confident
Policymakers should use all instruments at their disposal.
Costas Milas University of Liverpool Disagree Confident
Paolo Surico London Business School Agree Confident

"Unconventional" unconventional monetary policy

Participant Answer Confidence level Comment
Gianluca Benigno London School of Economics Neither agree nor disagreee Not confident
There might be a scope for expanding tools but my impression is that they might less effective as the current situation of low growth and inflation persists. For example the current Japanese experience with negative rates raises questions on its effectiveness and might suggest that alternative policy tools should be adopted (i.e. fiscal policy).
John VanReenen London School of Economics Agree Confident
Silvana Tenreyro London School of Economics Disagree Confident
I think it is too premature to put in place these untested policy options. More conceptual and ideally experimental work should be carried out before introducing these alternative tools.
Andrew Scott London Business School Strongly agree Extremely confident
Nicholas Oulton London School of Economics Strongly agree Extremely confident
In the UK case we have in effect already operationalised the use of helicopter money sine the period of active QED coincided with a large budget deficit. In other words, pensions and welfare benefits were being paid for by printing money, at least in part. So I don't see any great issue of principle here. We might as well retain the option of doing this again, should it prove necessary
Ray Barrell Brunel University London Disagree Very confident
Additions to the monetary policy toolkit are being discussed because real interest rates are very low, and in a period of low inflation this may mean nominal rates become negative. The central bank can only significantly affect the real rate of interest in the short run, although the inflation target may also have a marginal impact on it in the long run. If we are worried about low real rates for a sustained period, then we should consider the balance of saving and investment, both globally and locally. If real rates are too low for comfort we can raise them by changing this balance, and the most effective way to do that would be to increase government spending relative to receipts. This policy is available in most advanced economies, as there are no real worries about debt default in the US, the UK, Germany, Canada or France. Conventional and current unconventional monetary policies will then become easier to operate. However, this is not Friedman’s ‘helicopter money’. That would involve exactly what it says, the random dispersal of cash to individuals to induce them to spend more. Its advantage is that there is political interference in the process of helicopter drops, unlike in the design of government spending programmes. A drop programme does not need prior design. There are however suggestions around that new policies, such as large scale equity purchases through blind asset funds (to avoid political interference in the equity markets) would be wise. The design would require careful legislation, and would almost certainly be subject to capture by enthusiasts for a new interventionist economic strategy. However, an equity based tool seems too complex for our needs given that simpler solutions can be found within the current set of tools.
Richard Portes London Business School and CEPR Strongly agree Extremely confident
Charles Nolan University of Glasgow Agree Very confident
Andrew Mountford Royal Holloway Agree Confident
David Smith Sunday Times Disagree Confident
Operationalising additional tools would create an expectation of their early use, which may not be the signal that the Bank of England would want to send out. Better just to pledge to use all available tools as and when necessary.
Richard Dennis University of Glasgow Agree Confident
Ricardo Reis London School of Economics and Columbia University Neither agree nor disagreee Very confident
Helicopter money is a dangerous idea, negative interest rates are a good idea, and abolishing currency is a bad idea. Exploring other tools, like buying different assets under QE, and issuing different types of reserves are good ideas to explore in the future. So, I agree with studying and operationalizing new tools, but disagree with some of the ones in the question.
Wouter Den Haan London School of Economics Disagree Not confident
It is not clear to me that achieving central banks' objectives will become more manageable with these quite revolutionary instruments. In fact, steering a ship in a storm may become more difficult when the captain has many controls and it becomes more difficult for the ship's sailors and other ships to understand what is going to happen.
Martin Ellison University of Oxford Agree Confident
‘Helicopter money’ is a type of fiscal policy that may well be beneficial to hand over to central banks. There are many aspects of fiscal policy that are inherently political and so need to remain in the hands of politicians via the Treasury, but the use of discretionary fiscal policy to stabilise the economy is not necessarily one of them. The same caveats apply as before though, in that the independence of central banks is important if not sacrosanct. As for other alternative tools, there’s nothing special about money (is anonymity really such an issue given a decreasingly small proportion of transactions are conducted by cash, especially amongst the young?) so it makes sense to operationalise such tools. At time these tools are needed it will be too late to work out how they might operate.
Jan Eeckhout University College London Strongly agree Extremely confident
Jagjit Chadha National Institute of Economic and Social Research Agree Very confident
We seemed to have closed our mind to a number of possibilities that might include changes in the inflation target or changes in the nominal regime itself to, perhaps, nominal income targeting. But if we concentrate on tools, there may be a number to consider from operationalising negative interest rates on reserves, to re-thinking forward guidance, to using interest rate forecasts and even swaps more imaginatively, as well as developing other money market or balance sheet operations.
Alan Sutherland University of St. Andrews Agree Not confident
David Miles Imperial College Disagree Confident
If the question is asking about helicopter drops I do not agree that they are likely to be a useful tool. "Printing money” under helicopter drops really means financing purchases of government bonds by creating reserves, which may well be interest bearing. Distributing newly printed bank notes in exchange for government debt would, in fact, almost immediately be turned back into reserves. If reserves pay interest - as they do now and as I think they should - then "printing money" is just financing government spending by the government borrowing at Bank Rate, something it can do anyway by issuing Treasury Bills.
Sir Charles Bean London School of Economics Disagree Confident
'Helicopter' money is effectively a combination of a debt-financed income tax cut coupled with an open market purchase of the resulting bonds by the central bank. I have no problem with further fiscal stimulus, if conditions both warrant and permit, though the effect on demand of a (temporary) income tax cut is likely to be much less than that from, say, an increase in investment in infrastructure. Advocates of helicopter money will argue that a key point is that the monetary injection is permanent. However, they never say how this is to be made credible, as the central bank can always withdraw the injected reserves in the future - in effect there is a monetary 'vacuum cleaner' as well as a helicopter! So what determines whether the monetary injection is permanent or not depends on the policy framework, not any current announcement. Thus the Bank of England's past monetary injection as a result of QE will be permanent if, and only if, it is necessary to meet the inflation target in the future. There is no magic additional instrument waiting to be deployed here. While I agree that ever-larger doses of QE may be of declining effectiveness and carry attendant risks, e.g. to financial stability, I am not persuaded that measures to evade the lower bound on policy rates by taxing cash or eliminating it entirely are a good idea. Although cash is less important than it was, it remains useful for modest transactions and taxing cash or outlawing it would probably be regarded by the public as illiberal and unacceptable.If we have to go in this direction, then I would prefer to raise the target inflation rate, though I am not convinced we are at that point yet either. More generally, I think that trying to find ways to facilitate even lower real interest rates is tackling the symptom, rather the cause, which is a low natural (global) real safe rate of interest brought about by a mix of an high propensity to save that is too high relative to the propensity to invest (at a global level). Too much of the burden is being placed on monetary policy at the current juncture. More attention should instead be placed on fiscal and structural policies that would have the effect of raising the natural real rate of interest,
Ethan Ilzetzki London School of Economics Disagree Very confident
I support the use of fiscal policy as a countercyclical tool, but do believe this should remain within the remit of the Treasury. Helicopter money may be a way to exploit the Bank of England's independence to circumvent the political process, but I think this would be unwise. I have no opposition in principle to bringing interest rates below zero, but there is surely a limit to how negative rates can go, so this is a patch at best. I would much rather see countercyclical policy being used more actively in future recessions, or for the Bank of Engalnd's inflation target to be increased, than the tools suggested here.
Sir Christopher... London School of Economics Strongly agree Extremely confident
yes, as above
Simon Wren-Lewis University of Oxford Strongly agree Extremely confident
There are various alternatives to QE to use at the ZLB that are likely to be more effective than QE. In particular central banks should actively explore, in cooperation with governments, setting up the ability to undertake helicopter money. One of the undesirable side effects of central bank independence is that governments are no longer able to undertake a money financed fiscal stimulus in a deep recession. Governments and central banks need to put that right by one means or another.
David Cobham Heriot Watt University Agree Confident
Such tools might be useful - but, again, only if fiscal policy is not available.
Kate Barker British Coal Staff Superannuation Scheme Disagree Very confident
Central banks have sufficient tools for monetary policy. Beyond that, my view is that the choices are more fiscal.
Akos Valentinyi University of Manchester Strongly agree Very confident
Paul De Grauwe London School of Economics Agree Confident
Jim Malley University of Glasgow Disagree Not confident
Morten Ravn University College London Neither agree nor disagreee Confident
I think the issue is really that fiscal, monetary and macro pru policies need to be coordinated. There are situations - such as the current - where one set of instruments may become ineffective but we know that in these circumstances there will be other instrument that can emulate their effects which are still available. For example, fiscal devaluations can still be used as an instrument when the ZLB is binding for the short term nominal interest rate. Moreover, unconventional policies may be available but they do of of course have direct fiscal consequences and also impact on issues of direct importance for financial stability. So, I think the real issue is to formulate a framework that ensures consistency between different goals and coordination between different policy makers. Of course, in "normal times" these issues are rather straightforward so this really has to do with planning for abnormal circumstances.
Michael Wickens Cardiff Business School & University of York Disagree Confident
Given their ineffectiveness, there is no good case to use UMP at any time.
Francesco Caselli London School of Economics Agree Confident
Angus Armstrong National Institute of Economic and Social Research Strongly agree Confident
From a risk management perspective it would be prudent to operationalise alternative tools at least for the near term. In fact, one could regard it as negligent if alternative tools were not operationalised given the extraordinary economic conditions and failures in forecasting. I would expect the pros and cons of variations of 'helicopter drops' to at least be being considered behind closed doors. Of course, to be consistent with my first answer it must be clear that this is only when extreme conditions warrant.
Michael McMahon University of Oxford Disagree Not confident
It is clear that central banks should be thinking about the practicalities of a number of alternative tools for possible future use, but I think I fall short of fully advocating their operationalization at the moment.
Panicos Demetriades University of Leicester Agree Extremely confident
Having a range of tools thatbarebready to be used if and when the need arises makes very good sense for any central bank. It convinced markets that the central bank is always ready to act and increases the confidence that markets have to the ability of monetary policy to achieve its objectives, even when conventional policy has reached its limits. It can make forward guidance more credible.
Joseph Pearlman City University London Disagree Very confident
Negative interest rates might politically jeopardise the existence of an independent central bank. Fiscal policy should be decided independently of the central bank; any joint decision with the central bank will interfere with its independence.
Costas Milas University of Liverpool Disagree Confident
Paolo Surico London Business School Agree Confident