Spending growth through shopping vouchers – should central bankers be trying new things?

Billy Bambrough
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The US – which last year begin the process of tightening monetary policy – is highly unlikely to consider such measures (Source: Getty)

Over the last few months the term helicopter money – once only used to mock former Fed chair Helicopter Ben – has become common place.

For that we can thank the Bank of Japan and its increasingly desperate attempts to kick start growth, culminating this Friday with its latest policy meeting.

Many economists are expecting the Bank of Japan to expand its asset purchases and further cut rates in to negative territory – it could even go as far to bring in a version of helicopter money, but its unlikely to go whole hog and governor Haruhiko Kuroda has appeared to rule out more extreme moves.

The increasingly desperate situation for central bankers – having near exhausted their twin guns of lowering interest rates and extensive asset purchasing – has resulted in respected and established economists suggesting increasingly outlandish solutions to the problem of stagnation in developed economies.

Read more: The Bank of England is all but certain to slash rates next week

The latest has been Organisation for Economic Cooperation and Development (OECD) chief economist Catherine Mann who told Bloomberg TV standard helicopter money wouldn't boost growth – but free shopping vouchers might.

“Helicopter money by itself isn’t going to be any more effective at gaining economic growth than what the central banks have been doing already,” Mann said.

She argued people would be able to sit on cash – saving instead of spending.

“Now, helicopter shopping coupons: we could talk about that, where you actually have to go spend the money,” Mann said.

She's suggesting issuing to people money that has an expiry date.

What is helicoptor money?

Free money, created and distributed by the central bank for people to spend on whatever they like.

The theory is that a sudden injection of cash and spending into an economy would be the equivalent of a defibrillator shock – jolting an economy back to life.

US economist Milton Friedman coined the term helicopter money in the '60s and US Fed chair Ben Bernanke earned the moniker Helicopter Ben by saying it could be used to flight deflation.

Here's Friedman:

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.

Quantitative easing – through the country's central bank buying assets, usually in the form of government bonds – is similar to helicopter money but uses financial institutions to allow the stimulus to enter to economy more gradually.

Though the practise of helicoptor money has yet to be employed by a central bank there have been similar occurrences that have produced comparable effects.

Read more: The Bank was right to hold rates – even a cut in August would be a shot in the dark

The massive payments made by the UK's banks to customers in the form of PPI redress over the past decade have been directly credited with boosting spending and the economy.

Tax rebates – a common sight in may advanced economies – have been similarly compared.

Analysts at Deutsche Bank – despite the German aversion to lose monetary policy due to their unfortunate history with hyperinflation – have said central bankers could consider a helicopter drop in Europe to bump up inflation expectations, boost stocks and support growth.

A note issued by analysts at the bank said:

After years of tight fiscal / easy monetary policy in the developed world, there is hope among investors that both Japan and the UK might be close to embarking on central bank-financed fiscal easing.

We believe that such monetary financing (or helicopter money) could be a significant positive for equity markets, as it has the potential to support growth, helps to close the global output gap (which has effectively been stagnant at around two per cent of global GDP for the past five years) and push up inflation expectations, a key driver of the equity market.

Deutsche did however say they didn't think the "adoption of monetary financing is imminent".

Read more: Draghi to hold fire as Eurozone prepares for difficult summer season

And this does seem to be the case with Bank of England governor Mark Carney branding it a "compounded Ponzi scheme" and European Central Bank president Mario Draghi ruling out the possibility of helicopter money.

But with growth remaining stubbornly absent, further forays into negative interest, as well as increasingly extreme monetary stimulus begin to look more attractive.

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