August 27, 2020 – The Bank of Canada should avoid going direct with cash for consumers to influence economic activity, such as through a helicopter drop or creating a standing facility, says a new report from the C.D. Howe Institute.
In “‘Going Direct’: Not a New Tool, But an Old Pitfall for the Bank of Canada,” authors Thorsten V. Koeppl and Jeremy Kronick analyze “going direct,” an alternative monetary policy tool the Bank of Canada could use to disburse cash and stimulate demand, and outline where the risks lie in this approach.
With the Bank of Canada’s interest rates hitting their lower bound at 0.25 percent, the Bank is deprived of its most direct tool to influence economic activity. At the same time, the federal government is running record deficits to bridge households and businesses through the COVID-19 crisis. This puts the limits of future fiscal policy at risk and poses the questions of whether central banks should have a more direct way of delivering economic stimulus.
"We consider whether the Bank of Canada should employ going direct as another tool to achieve its inflation target when interest rates are at the lower bound, and not as a way to finance large government debt post-COVID," explains Koeppl.
The Bank of Canada can go direct in two ways. The first is to transfer extra funds directly to the general public – often described as a “helicopter drop”: “cash” is printed and dropped onto people as transfers – a one-for-one, dollar-for-dollar combination of monetary policy and fiscal transfer. The second way is through a standing facility at the Bank, where the government issues debt directly to the central bank against funds that are then disbursed to the public. Both these methods could foster inflation when the Bank cannot lower interest rates any longer to achieve its inflation target..
Yet, the authors argue, both of these approaches have risks that have to be weighed against alternative policy options.
“Going direct would open the door to political interference with monetary policy, even under a well-designed system,” write Koeppl and Kronick. “Furthermore, it is not clear what the benefits would be relative to other monetary policy options, such as forward guidance, that promises to keep interest rates low for long, or quantitative easing that flattens the yield curve across different assets.”
For more information contact: Thorsten V. Koeppl, Professor and RBC Fellow, Queen’s University; Jeremy Kronick, Associate Director, Research, C.D. Howe Institute; or Nancy Schlömer, Communications Officer, C.D. Howe Institute, email: nschlomer@cdhowe.org.
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.