Global monetary policy is at a cross-roads. Japan’s experience this year demonstrates the limits of central bank policy with the bank running out of government bonds to buy, negative rates reaching their limits and inflation expectations having almost completely unwound their Abenomics move higher.
A special report from Deutsche Bank Research concludes that “helicopter money”, the ultimate form of monetary policy has strong historical precedent, reasonable legislative flexibility and can prove substantially more powerful than traditional monetary or fiscal policy. One only has to consider the current political narrative around the world to draw the conclusion that persistent aversion to fiscal easing is dominated by medium-term sustainability concerns.
These mostly seem political, rather than financial, given the current ultra-low level of yields. But by overcoming perceptions around these constraints and harnessing the infinite power of central bank balance sheets, money-financed fiscal policy has the potential to be a powerful tool for global monetary and fiscal easing. Maybe not today, but in the next recession.
Irrespectively, with Japan fast approaching the limits of its existing policy response to deflation, developments need to be followed closely for signs of the next global policy innovation.