E Hope For The Real Economy, Pigou Effect, TLTRO Helicopter Money

And as quoted by Lonergan, Friedman himself said, in defense of base money being held by the people as a more affective tool than QE and asset purchases by the Fed:

“This revival [of belief in the potency of monetary policy] was strongly fostered among economists by the theoretical developments initiated by Haberler but named for Pigou that pointed out a channel – namely, changes in wealth – whereby changes in the real quantity of money can affect aggregate demand even if they do not alter interest rates. These theoretical developments did not undermine Keynes’ argument against the potency of orthodox monetary measures when liquidity preference is absolute since under such circumstances the usual monetary operations involve simply substituting money for other assets without changing total wealth [i.e. QE]. But they did show how changes in the quantity of money produced in other ways could affect total spending even under such circumstances. [italics added]”...

...Whatever one calls it, what Friedman and Haberler are clearly arguing is that cash transfers to households financed by base money would stimulate demand under deflation and the transmission mechanism is rising real balances. Base money is not a liability, so Ricardian equivalence – if you care about it – is not relevant. And neither if one thinks about it, is the issue of “permanence”.

With the TLTRO, the ECB is never out of bullets. Lonergan says :

With every TLTRO the ECB chooses the interest rate, the duration of the loan, and potentially, the credit risk. Why is this potentially more important than all other monetary tools? Because the ECB is never out of ammunition with a TLTRO...

Eric Lonergan goes on to say that negative rates are possibly a tightening, because as they go more and more negative, the result is that the banks are taxed. The TLTRO avoids that tax, and makes it possible for the official rate to stay positive.

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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