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Helicopter Money: Irredeemable Fiat Money and the Liquidity Trap

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Author Info
Buiter, Willem H

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Abstract

The Paper provides a formalization of the monetary economics folk proposition that government fiat money is an asset of the holder (the private sector) but not a liability of the issuer (the state). Money is 'net wealth' in the limited sense that, after consolidation of the intertemporal budget constraints of the private and public sectors, the present value of the terminal money stock remains a component of comprehensive household wealth. The issuance of irredeemable fiat money can therefore affect consumption demand through a weak 'real balance or Pigou effect', if it can alter the present value of the terminal stock of money. With irredeemable fiat money, weak restrictions on the monetary policy rule suffice to rule out liquidity trap equilibria (that is, equilibria in which all current and future short nominal interest rates are at their lower bound) that are also rational expectations equilibria. Liquidity trap equilibria that are not (long run) rational expectations equilibria can exist if and for as long as the private sector has incorrect but irrefutable expectations that the monetary authorities will ultimately reverse, in present value, any current expansion of the monetary base. If 'quantitative easing' is never reversed, in present value terms, and never expected to be reversed, liquidity trap equilibria cannot occur.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4202.

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Date of creation: Jan 2004
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Handle: RePEc:cpr:ceprdp:4202

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Related research
Keywords: helicopter money drop; irredeemable money; liquidity trap; monetary policy effectiveness; zero bound;

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Buiter, Willem H, 2003. "Two Naked Emperors? Concerns about the Stability and Growth Pact and Second Thoughts About Central Bank Independence," CEPR Discussion Papers 4001, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Gauti B. Eggertsson & Michael Woodford, 2003. "Optimal Monetary Policy in a Liquidity Trap," NBER Working Papers 9968, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Hall, Robert E., 1983. "Optimal fiduciary monetary systems," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 33-50. [Downloadable!] (restricted)
  4. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359. [Downloadable!] (restricted)
  5. Willem H. Buiter, 2002. "The Fiscal Theory Of The Price Level: A Critique," Economic Journal, Royal Economic Society, vol. 112(481), pages 459-480, July. [Downloadable!] (restricted)
  6. Buiter, Willem H, 2003. "Deflation: Prevention and Cure," CEPR Discussion Papers 3869, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467. [Downloadable!] (restricted)
  8. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April. [Downloadable!] (restricted)
    Other versions:
  9. Araujo, A. & Scheinkman, J. A., 1983. "Maximum principle and transversality condition for concave infinite horizon economic models," Journal of Economic Theory, Elsevier, vol. 30(1), pages 1-16, June. [Downloadable!] (restricted)
  10. Michel, Philippe, 1990. "Some Clarifications on the Transversality Condition," Econometrica, Econometric Society, vol. 58(3), pages 705-23, May. [Downloadable!] (restricted)
  11. Willem H Buiter & Nikolaos Panigirtzoglou, . "Liquidity traps: how to avoid them and how to escape them," Bank of England working papers 111, Bank of England. [Downloadable!]
    Other versions:
  12. Gauti B. Eggertsson, 2003. "How to Fight Deflation in a Liquidity Trap: Committing to Being Irresponsible," IMF Working Papers 03/64, International Monetary Fund. [Downloadable!]
  13. Obstfeld, Maurice & Rogoff, Kenneth, 1983. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 675-87, August. [Downloadable!] (restricted)
    Other versions:
  14. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall. [Downloadable!]
  15. Chadha, J.S. & Charles Nolan, 2002. "Output, Inflation and the New Keynesian Phillips Curve," Cambridge Working Papers in Economics 0204, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  16. King, Robert G., 1983. "On the economics of private money," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 127-158. [Downloadable!] (restricted)
  17. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1007-1057.
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  18. Michael Woodford, 1995. "Price Level Determinacy Without Control of a Monetary Aggregate," NBER Working Papers 5204, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  19. Fama, Eugene F., 1983. "Financial intermediation and price level control," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 7-28. [Downloadable!] (restricted)
  20. Kamihigashi, Takashi, 2001. "Necessity of Transversality Conditions for Infinite Horizon Problems," Econometrica, Econometric Society, vol. 69(4), pages 995-1012, July.
  21. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  22. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-74, June. [Downloadable!] (restricted)
  23. Sims, Christopher A., 2001. "Fiscal Aspects of Central Bank Independence," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  24. Willem H. Buiter & Nikolaos Panigirtzoglou, 2003. "Overcoming the zero bound on nominal interest rates with negative interest on currency: gesell's solution," Economic Journal, Royal Economic Society, vol. 113(490), pages 723-746, October. [Downloadable!] (restricted)
  25. Buiter, Willem H & Sibert, Anne, 2006. "Deflationary Bubbles," CEPR Discussion Papers 5637, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  26. Marc D. Weidenmier & Richard C.K. Burdekin, 2002. "Suppressing Asset Price Inflation: The Confederate Experience, 1861-1865," NBER Working Papers 9230, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  27. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Oxford University Press, vol. 18(2), pages 203-20, April.
  28. Obstfeld, Maurice & Rogoff, Kenneth, 1986. "Ruling out divergent speculative bubbles," Journal of Monetary Economics, Elsevier, vol. 17(3), pages 349-362, May. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Willem Buiter, 2004. "A Small Corner of Intertemporal Public Finance - New Developments in Monetary Economics: 2 Ghosts, 2 Eccentricities, A Fallacy, A Mirage and A Mythos," NBER Working Papers 10524, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Wilem H. Buiter, 2005. "Overcoming the Zero Bound on Nominal Interest Rates: Gesell's Currency Carry Tax vs. Eisler's arallel Virtual Currency," Hi-Stat Discussion Paper Series d05-96, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  3. W.H. Buiter, 2007. "Is Numérairology the Future of Monetary Economics?Unbundling numéraire and medium of exchange through a virtual currency and a shadow exchange rate," CEP Discussion Papers dp0776, Centre for Economic Performance, LSE. [Downloadable!]
    Other versions:
  4. Buiter, Willem H, 2006. "How Robust is the New Conventional Wisdom? The Surprising Fragility of the Theoretical Foundations of Inflation Targeting and Central Bank Independence," CEPR Discussion Papers 5772, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Buiter, Willem H & Sibert, Anne, 2006. "Deflationary Bubbles," CEPR Discussion Papers 5637, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Willem H. Buiter, 2004. "The Elusive Welfare Economics of Price Stability as a Monetary Policy Objective: Should New Keynesian Central Bankers Pursue Price Stability?," NBER Working Papers 10848, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Tomasz Michalak & Jacob Engwerda & Joseph Plasmans, 2009. "Strategic Interactions between Fiscal and Monetary Authorities in a Multi-Country New-Keynesian Model of a Monetary Union," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  8. Willem Buiter, 2005. "Overcoming the zero bound on nominal interest rates: Gesell’s currency carry tax vs. Eisler’s parallel virtual currency," International Economics and Economic Policy, Springer, vol. 2(2), pages 189-200, November. [Downloadable!] (restricted)
  9. Willem H. Buiter, 2006. "The elusive welfare economics of price stability as a monetary policy objective - why New Keynesian central bankers should validate core inflation," Working Paper Series 609, European Central Bank. [Downloadable!]
  10. Willem H. Buiter, 2007. "Seigniorage," NBER Working Papers 12919, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Willem Buiter, 2007. "Is Numérairology the Future of Monetary Economics?," Open Economies Review, Springer, vol. 18(2), pages 127-156, April. [Downloadable!] (restricted)
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