Almost dramatically central banks have escalated their role in economic growth and employment generation (poverty reduction) outweighing their pre-occupation with maintaining price stability. Their minor role of promoting growth has now assumed overarching importance. This policy stance became overt in the case of central banks in developed countries after the 2008 financial crisis that unleashed a debilitating credit crunch. In conjunction with stalled, even declining consumer expenditure, this financial crisis held back economic recovery of developed countries where even massive bailout programmes failed to kickstart the economy as seen in the case of America in the early years of the crisis. In the event, the Federal Reserve Bank (Fed), the central bank of America, stepped in with the unconventional policy of Quantitative Easing (QE) which involved purchase of bonds from cash-strapped banks to augment their liquidity. Coupled with near zero interest rate this injection of money was expected to give fillip to economic recovery. After three phases of QE America economic began to show signs of steady, if not robust, recovery. The Fed was poised to increase the base interest rate but weak recovery of economies and financial volatility elsewhere in world held it back. This pause has put the spotlight on Fed's role not only in the national economy but also beyond, highlighting the interconnectedness of monetary policy in a globalised economy. The latest pressure on the brake against raising interest rate came from Brexit declaration in the UK on June 23. But the fact that after three instalments of QE its discontinuation and the readiness of Fed to raise rate have proved the success of the monetary stimulus measures taken by Fed, which has been likened to 'helicopter money'.
The idea of helicopter money dates back to the monetarism debates of the 1960s initiated by Professor Milton Friedman. A central bank was visualised to have options for stimulating aggregate demand even at the risk of stoking inflation provided it was willing to adopt unconventional measures. What was a theoretical proposition became a concrete fact after the 2008 financial crisis.
The proponents of unconventional financial measures or helicopter money include former Fed chairman Ben Bernanke, Adair Turner, former head of UK's Financial Services Authority, Mr. Kuroda of Bank of Japan (BOJ) and the late entrant, Mr. Mario Draghi of the European Central Bank (ECB). In the UK, the Bank of England (BOE) followed in the footsteps of Fed and purchased bonds to increase the liquidity of banks accompanied by interest rate cuts as a complement.
Though the policy of monetary stimulus yielded the desired result, the British economy received a sudden jolt after June 23 when Brexit referendum was held. In the backdrop of falling pound and turmoil in the stock market with their spillover effect on the global economy the chief economist of BOE said with a note of urgency that BOE needed to stimulate the economy and boost confidence among investors. The BOE may now embark on a new phase of dropping helicopter money through bond purchase. The policy may also include more innovative measures such as purchase of private sector assets or incentives for banks to lend. The BOE Governor, Mark Carney has said that BOE would be unable to fully offset the economic damage from leaving the European Union (EU) as its impact will play out over the medium to long term. The implication of this is that loose monetary policy will have to be in place over the long haul to bring economic growth and employment in the UK post-Brexit back on track. This is because unlike the financial crisis of 2008, Brexit's impact cuts across sectors - monetary, fiscal, trade and foreign investment. In the situation emerging after Brexit monetary policy of dropping helicopter money by BOE may thus become a long-drawn-out process, showing its limitation in addressing a crisis that impinge multiple sectors.
In the recent past, financial markets in Japan have seen heightened speculation that the government will resort to using helicopter money through BOJ to directly finance budget stimulus though programmes such as purchasing perpetual bonds. There are indications that unlike Fed and also BOE, the BOJ will go for buying bonds without requiring banks to repay i.e. redeem their bonds in future, making them 'perpetual'. So, the monetary policy to be followed by BOJ is likely to use helicopter money without much concern about its balance sheet till the economy picks up and get the better of deflation. Pursuing a mix of aggressive fiscal and monetary expansion Japan is expected to avoid relying on helicopter money alone. The tradition of programme intervention (public investment) in various sectors, particularly infrastructures, allows Japan to use fiscal policy as a tool of boosting demand and promoting growth which is not the case in America and U.K.
So far this year, in a bid to kick-start recovery and drive inflation rates up to levels more compatible with healthy economic growth, the ECB has beefed up its asset purchase programme (QE), cut its main refinancing rate to zero and launched a new programme of ultra-cheap loans to banks.
The Brexit vote in the UK has increased what were already significant downside risks to the eurozone economy. Though the ECB has held fire on monetary policy, particularly in regard to interest rate, in the immediate aftermath of Brexit it is most probably preparing the ground for more stimulus measures in September when the economic fallout for the eurozone from Brexit will become clearer. A potential risk for ECB in its pursuit of loose monetary policy (QE) is the drop in bond yields as investors seek out ultra-safe investments. The yield on Germany's 10-year government bond is already negative effectively disqualifying them from being purchased under the ECB's QE programme. This points to a structural problem of providing stimulus through monetary policy in the eurozone. Failing to increase the demand for bond in the market, ECB may revisit and even change its self-imposed QE rules that require it can only buy bonds with yields above its deposit rate.
Bangladesh is in the fortunate position where almost all the private sector commercial banks are flush with money. Re-capitalisation will be required only for state-owned banks. Lest this becomes an endless affair, some of the public sector banks may be divested or merged. To promote growth and generate employment (poverty reduction) Bangladesh Bank does not have to inject money through purchase of bonds or cut its basic lending rates. Monetary policy in Bangladesh can concentrate on giving incentives to banks to make more credit available to the private sector investors. For instance, it has recently allowed 13 private sector banks to invest in the stock market up to 25 per cent of their total capital. There are other ways of encouraging the banks to play a major role in economy. What constitute these incentives should be at the heart of monetary policy.
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Monetary policy and central banks: The growth scenario
Hasnat Abdul Hye | Published: July 29, 2016 00:00:00 | Updated: February 01, 2018 00:00:00
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