Download This PaperCOVID-19 Pandemic, Direct Cash Transfers, and the Federal Reserve
7 Pages Posted: 31 Mar 2020
Date Written: March 18, 2020
Abstract
Over the past few years, some observers have been warning that the Fed needs to update its operating framework to include a level target and the ability to implement direct cash transfers in special situations like the current crisis. They make the case that it is better for the Fed to provide any direct cash transfers because it is nimbler and more likely to do so in a rules-based manner.
That time has come, and this policy brief shows how to ensure that the overhaul of the Fed’s operating framework can provide powerful countercyclical policy in a manner that is both systematic and based on rules. The overhaul consists of three main steps: First, the Fed needs to adopt a two-rule approach to monetary policy so that it can handle both positive and negative interest rate environments. Second, the Fed needs to adopt a nominal GDP level target so that it can stabilize dollar incomes and make up for past misses in its target. Finally, the Fed needs to be given a standing fiscal facility so that it can do direct money transfers, or “helicopter drops,” to households once interest rates hit 0 percent. This feature cuts out the “middleman” of monetary policy during severe economic downturns. These three steps are outlined in greater detail in this policy brief.
Keywords: Federal Reserve, monetary policy, economic, federal government, COVID-19, 2019 novel coronavirus, 2019-nCoV, Corona Virus Disease 2019 (COVID-19), pandemic
JEL Classification: E12, E52, E50
Suggested Citation: Suggested Citation
David Beckworth (Contact Author)
Mercatus Center at George Mason University ( email )
3434 Washington Blvd. 4th Floor
Arlington, VA 22201
United States
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