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September 15, 2020

Looking for more tools that the Bank of Canada can use to help our COVID-stricken economy recover, some observers argue for “going direct,” having the Bank of Canada “print money” and deliver it directly to households as transfers. In our view, that is a bad idea.

Broadly speaking, the Bank of Canada can “go direct” in two ways. One is to transfer extra funds directly to the general public — a technique often described as a “helicopter drop.” Imagine squadrons of helicopters flying over the country dropping cash out their loading bays. In fact, neither helicopters nor, for the most part, cash would be involved: rather, the Bank of Canada would send people cheques or make direct deposits into their bank accounts — a one-for-one, dollar-for-dollar combination of monetary policy and fiscal transfer.

Another option would be through a standing debt facility at the Bank of Canada that would serve as a pot of cash for the government. Essentially, the government would sell bonds directly to the Bank of Canada and in return receive funds deposited into its account at the Bank. These funds would then be transferred directly to Canadians, most likely to their bank accounts. In this case, the government would still make transfers to people, but their delivery would be facilitated by the Bank of Canada, which would accept newly issued debt from the government in exchange for the money the government would distribute.

Both options lead to the same outcome: an increase in the money supply through direct transfers initiated and facilitated by the Bank of Canada. This would foster spending and, thus, inflation, which would help the Bank of Canada meet its two per cent inflation target.

What would be the rationale for such a policy? As pointed out in our recent C. D. Howe Institute Commentary, two entirely different lines of reasoning have been used to justify central banks’ “printing money” to finance transfers.

One line — popular in today’s COVID-19 context — is that, instead of having governments sell debt in capital markets in order to cover their burgeoning deficits, central banks can finance them by simply printing money. After all, central bank money is the cheapest form of government debt — it pays zero interest — and if central banks take these transfers onto their balance sheets, that theoretically eases the pressure on government finances. Of course, printing money is no free lunch: a permanently higher money supply very likely leads to inflation, which is an implicit tax on savers that is no less painful or consequential for being implicit.

A different line of reasoning focuses on how central banks can achieve their mandated inflation targets when interest rates — the Bank of Canada’s usual lever for manipulating economic activity — have gone as low as they can go. In this regard, “printing money” and handing it to consumers is a fast and direct way to stimulate the economy temporarily in order to achieve the two per cent inflation target. From the Bank of Canada’s point of view, that is the only possible rationale for direct-to-household stimulus. After all, its mandate is to regulate inflation, not finance government debt or conduct social policy.

Though there are these rationales for it, we would strongly advise against the use of this tool. First, although the Bank of Canada has gone about as far as it can go in lowering interest rates, it still has other powerful tools that it has not yet exhausted, including “forward guidance” (declaring it will keep interest rates low for long) and quantitative easing (buying up assets to keep interest rates low all along the yield curve, including at the long end, not just in the overnight market in which it traditionally operates).

Second, some advocates see helicopter drops as a way to fix fiscal policy that is either unwilling or too slow to employ transfers in crisis times. Recent experience belies that, however. During the pandemic, fiscal policy has been more than swift, and is arguably on the verge of becoming too generous. Getting the Bank of Canada involved beyond its current debt purchases would blur the so far reasonably clear separation between fiscal and monetary policy, and the responsibilities that come with each.

This brings us to our last and most important objection. Even if the tool were to offer unique benefits and could be put into a well-designed framework, it cannot overcome an old, well-known pitfall: good monetary policy is impossible if subjected to undue political influence — and that is an inevitability under “going direct.” If inflation remained low, there would be pressure to keep the government debt facility open. If, on the other hand, inflation rose too fast, the Bank of Canada would have to sell off the debt and/or hike interest rate rates, which would worsen the government’s, and the Bank of Canada’s, balance sheet. There would again be immense pressure to keep the facility open.

Inflation control is one of the biggest achievements of economic policy in Canada over the past three decades. Credibility and independence are vital for any central bank. The Bank of Canada has worked hard to achieve both and has largely succeeded. That might change, however, if people receive a government cheque in the mail that they know has been enabled solely by the Bank of Canada’s balance sheet magic. Non-political monetary policy has worked for Canada for at least a generation now. Inserting politics directly into monetary policy would put that achievement at risk.

Published in the Financial Post

Thorsten V. Koeppl is a professor of economics at Queen’s University and scholar in financial services and monetary policy at the C.D. Howe Institute, where Jeremy Kronick is associate director of research.