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Helicopter Money: Irredeemable Fiat Money and the Liquidity Trap

  • Willem H. Buiter

The paper provides a formalisation of the monetary folk proposition that fiat base money is an asset of the holder but not a liability of the issuer. The issuance of irredeemable fiat base money can have pure fiscal effects on private demand. With irredeemable fiat base money, weak restrictions on the monetary policy rule suffice to rule out liquidity trap equilibria - equilibria in which all current and future short nominal interest rates are at their lower bounds. In a model with flexible prices, liquidity trap equilibria cannot occur as long as the private sector does not expect the monetary authority to reduce the nominal money stock to zero in the long run. In a New-Keynesian model out provided the private sector expects the authorities not to reduce the nominal stock of base money below a certain finite level in the long run. Liquidity trap equilibria can exist if and for as long as the private sector expects that the monetary authorities will ultimately reverse any current expansion of the monetary base in present value terms.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10163.

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Date of creation: Dec 2003
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Handle: RePEc:nbr:nberwo:10163
Note: EFG ME
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