What is helicopter money (HM) supposed to accomplish? Advocates of HM believe that HM acts as a stimulus which increases the level of economic activity. In this post, I construct a simple model and show in detail how it works. The steady state economy – an economy with a constant aggregate nominal income and expenditure per time – is described first. Next, the effect of reduced spending and income of the agents is illustrated. And then it is discussed how the economy can be returned to its previous steady state of spending.
What are the assumptions behind the model? And what is the scope of this post?
- The economy is closed, there are no inflows from or outflows to the “rest of the world”
- There is one single currency
- Only nominal amounts and flows of money are considered in this post.
The effects of stimulus on prices and exchange rates will be discussed in later posts.
Easy numerical examples are used throughout this blog post. As I wrote before, this avoids the hidden inconsistencies that many words-only economic commentaries suffer from. The reader can check the logic of the model and expand it further for his own use. This should make it a powerful analytic tool for economists. I am planning to frequently use this model for further research, to answer questions regarding balance of payments and transfers between economic classes.
Continue reading “Helicopter money part III: economic stimulus”
As I know a thing or two about helicopter money, I like to help out when people have misconceptions about it. American economics professor Brad DeLong recently accused Claudio Borio, Piti Disyatat, Anna Zabai of manufacturing objections against helicopter money on his blog and on Twitter. I reacted to the tweet of DeLong, pointing out that Borio et al. had raised a valid point.
When I checked back to see if DeLong had replied, it turned out that he had blocked me. As I am new to Twitter, I thought that maybe I was blocked because DeLong received too many messages from me.
Continue reading “Manipulating Brad DeLong suffers from status anxiety. Sad!”
Helicopter money (HM) is money printed by the central bank that is given to the people. Figuratively speaking, Mario Draghi would fly over the Eurozone and drop new €50 bills out of a helicopter to the population below. In the first part of this series, I explored the possible sources of HM. The current post looks at the political constraints that prevent the ECB from firing up the engines of its helicopters. Continue reading “Helicopter money part II: politics”
Scientists build models that capture the essence of some observed phenomenon. The models that I like best are strongly simplified. This in contrast to very complex and non-transparent models that try to replicate every aspect of reality. Good models allow us to gain insight into something we observe by using a limited number of key concepts. I use simple models to be explicit about the underlying assumptions and to be consistent. Continue reading “My favorite type of model”
I was doing some research for a post about how the Trump presidential candidacy exposes the political biases of economists. But then I came across the blog of Scott Sumner. Professor Sumner has been teaching economics for over 25 years. Mr. Sumner is an advocate for a monetary policy called NGDP targeting. He also hates Donald Trump.
What I found stunning while reading Dr. Sumner’s articles are not his political views, but rather how poor his understanding of financial economics really is. As an exercise, I recommend that you take a look at these three articles. Can you identify his implicit assumptions and outright false claims? Continue reading “Quiz: Can you spot the economic errors of Scott Sumner?”
It is not my ambition to police the blogosphere, but since helicopter money is such a hot topic, this post will point out some inconsistencies in yesterday’s post of Nick Rowe. Keep in mind that I do not criticize him as a person! I have a lot of respect for people who are open about their thinking process, free for the whole world to see. Especially when they have a professional stake in this (Dr. Rowe is a professor of economics).
I have copied Nick’s post below in its entirety and put it in italics. The pictures and normal text are mine. For ease of discussion in the comments or on Twitter, I have labeled the pictures as Cases. Continue reading “Helicopter bonds – A reply to Nick Rowe”