COVID-19 Helicopter Money, Monetary Policy and Central Bank Independence: Economics and Politics

Abstract

This article discusses a form of fiscal monetization that produces losses in the central bank’s balance sheet, without a permanent increase in the money base. If an independent central bank acts as a long-sighted policymaker, an optimal helicopter monetary policy can be identified. At the same time, if the government in charge is made up of career-concerned politicians and citizens are heterogenous, then the policy mix will produce distributional effects, and conflicts between politicians and central bankers will be likely. Political pressures will arise and the helicopter money option will be less likely. The framework is applied in a discussion of the economics and politics of issuing COVID-19 perpetual bonds with the European Central Bank as the buyer.

Keywords: : helicopter money, monetary policy, fiscal policy, political economy, central bank independence, modern monetary theory, populism, European Central Bank

JEL Classification: D72, D78, E31, E52, E58, E62