30 March 2015

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The Centre for Monetary Advancement seeks to develop and promote ideas to create 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 principle new 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. 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

E-helis stimulate spending through higher monetary wealth of e-heli recipients. As a result of higher monetary asset wealth from heli’s lending will also be stimulated due to improved creditworthiness as well as an increase in loanable funds. Heli's are superior to current interest rate targeting tools because they generate spending stimulus independently of the credit channel while simultaneously stimulating credit. Therefore dysfunctional credit markets or banking systems should not affect the operation of monetary policy.

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.

Heli's stimulate capital investment by increasing spending and hence income. Higher demand will stimulate investment as entities compete for income. Heli's avoid generating excessive speculation through overly stimulating credit into an environment of low growth in which investment is not appealing due to low demand.

If people can hold central bank created e-money private bank issuance of demand deposits self regulates. Assuming CB e-money is equally as functional for payments people will mainly hold demand deposits (zero interest money) at the central bank because it is risk free whereas commercial bank deposits are not. CB issued e-money also has other benefits over privately issued money due to CB economies of scale and because the CB will operate in interest of public while private banks tend to operate to maximize shareholder profits. People may primarily use CB e-money if money is originated in e-money accounts during monetary expansions of helicopter drops by the monetary authority.

If people hold most or a significant proportion of their demand deposits at the central bank the current liabilities of commercial banks will be lower and hence banks will be less susceptible to bank runs.

Private banks can create money but unless it pays interest people will shift money away into risk free central bank accounts which will drain banks of assets. Therefore private bank created money will need to pay interest and this added cost to issuers will...

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