31 January 2015

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The Centre for Monetary Advancement seeks to develop and promote a monetary system structured to provide greater economic stability and sustainable long term growth through efficient and equitable institutional arrangements. CMA is a not for profit and nonpartisan organization.
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The E-money Helicopter Drop Proposal (Brief)

Two basic central bank reforms to increase monetary policy effectiveness, equality and reduce systemic risk:

1. Extend the provision of electronic deposit accounts or e-money by the central bank (CB) to all people and other entities instead of only depository or financial institutions. The CB is tasked with providing the supply of money and should therefore also provide an efficient electronic means of making payments and depositing the money it creates. Physical notes, coins and commercial bank deposits or other forms of broader money will continue to exist in their current form.

2. Incorporate new policy tools so the monetary authority can attain its targets more effectively and equitably.  The key tool is the e-money helicopter drop. When the monetary authority is pursuing expansionary monetary policy in order to attain its goals related to unemployment, GDP growth or inflation it can periodically expand the supply of central bank e-money directly and evenly into all citizen's accounts through helicopter drops. Other policy tools such as the ones currently employed may also utilized when optimal. The rate of monetary growth through helicopter drops to the public should be periodically adjusted by the central bank in order to attain its targets while it may also conduct temporary open market operations or issue securities in order to fine tune the short term interest rate or contract the monetary base. E-money heli-drops  would represent a more effective version of helicopter drops because central bank independence is not compromised. New legislation would need to be crafted to allow central banks to perform e-heli's including strict limitations on how e-heli's are performed.

Principle benefits of proposal

The various stimulatory or contractionary effects as a result of adjustments in the money supply and hence interest rates will continue under helicopter drops with the addition of new direct mechanisms of action through increased public nominal monetary wealth. E-helis will nominally increase monetary wealth of recipients by the amount of newly created money. Under asset purchases or lending the newly created money received by the central bank counter-party does not result in an increase in wealth because it is offset by a new liability or the loss of an asset. Portfolio re-balancing may induce a wealth effect under tools such as quantitative easing, but helis have the added benefit increasing monetary wealth while also inducing the re-balancing effect.

Helicopter drops of central bank issued e-money allow the central bank to conduct helicopter drops in order to stimulate the economy without requiring the cooperation of the fiscal arm of the government. This would simplify the process of performing heli-drops and remove any conflicts of interest that may arise from undermining central bank independence.

If e-money is accounted for as a type of equity and not a liability on the balance sheet at creation issues of central bank solvency are less of a concern and wont require additional government borrowing or taxation in future due to budget constraint. Issuance of money by a government entity to its constituent is most accurately accounted for as equity. This is somewhat similar to a corporation issuing stock to existing shareholders. If e-money is recognized as equity the central bank can issue the quantity of money required to achieve targets without needing to purchase assets. Under current system the central bank buys assets such as bonds which are claims on the money it creates issued by another government branch so money currently has no real backing. Ultimately the true backing of fiat money is effective and transparent management of the monetary system leading to a strong economy.

E-heli's diminish debt even under a zero inflation policy because they increase the asset side of everyone's balance sheet. There is no zero bound problem to address. By stimulating spending of people broadly e-helis...

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