In the past, the management of monetary policy by central banks was quite simple. When economic growth slowed they reduced interest rates to discourage saving and encourage borrowing, thereby increasing spending and getting economies moving again. When growth threatened to get too strong and inflation risked getting out of control, they increased rates again to put a gentle brake on economic activity.
After the crash in 2008 central banks began to realise (some a lot sooner than others) that policies that worked in the past wouldn’t be enough this time, and other ideas would be required. The Federal Reserve began its first Quantitative Easing (QE) programme in November 2008, and continued with similar measures until late 2014. While the US economy is still not growing at rates that were the norm before the crash, it can be argued that QE helped to prevent a 1930s-style depression that many had feared, and bring US employment back below 5%.
The Bank of England has also had a series of QE programmes, beginning in March 2009, and again it can be argued that they were successful given that the UK avoided the deep and prolonged recession suffered by many of its European neighbours. However, following the recent referendum the chances have increased that the BOE may have to revive its QE activities to counter the negative economic impact of Brexit.
At this point there is little evidence to say that the ECB’s QE policy has been a success. Much of the Eurozone is experiencing little or no growth, and the inflation rate is stuck at 0.1%, well below the target rate of 2%. The ECB shoulders much of the blame as its actions have arguably been too little too late (it didn’t start QE until March 2015, almost 6½ years after the Fed). The ECB is also now facing the problem that having bought €60bn of bonds per month since the programme began (increased to €80bn in recent months), it is now running out of bonds that meet the criteria which govern which assets it is allowed to purchase. A new policy may be needed.
Japan is another country that has had a notable lack of success in reviving its economy despite many years of near-zero or negative rates and repeated doses of QE from the Bank of Japan. The BOJ actually introduced a form of QE as far back as 2001, and there is speculation now that it may again be the first central bank to introduce another unconventional form of monetary policy, namely “helicopter money”.
The term “helicopter money” was first used by the Nobel-winning economist Milton Friedman who said that one sure-fire way of getting an economy moving was for someone to get up in a helicopter and drop bundles of $50 notes down on the general populace. While nobody is currently talking about dropping money from a chopper, other policies which would have broadly the same impact are being actively debated. In its simplest form, helicopter money could involve a central bank lodging a certain amount of money into the bank account of every man, woman and child in a country, with no requirement to repay that money.
If Japan were to introduce a form of helicopter money it would almost certainly be in a more complex and indirect form than that, but regardless of what form it might take, it would be very closely monitored here in Europe. The ECB resisted QE for a long time on the basis that it was too unconventional for its tastes. Helicopter money would be an even more radical departure, but nothing should be ruled out at this point.