Riksbank Deputy Governor Cecilia Skingsley asked an interesting question: "If monetary policy seems to have lost its magic touch, what can central banks do?"
In a speech summarized on the Riksbank website, Skingsley had some interesting things to say about the efficacy of NIRP, central banks playing follow the leader, and the use of helicopter money as being a viable path forward for central banks.
Skingsley acknowledges that despite negative interest rates and other monetary policy stimulation, inflation is far below target in many countries. The central banker of course doesn't mention that central banks have lost their collective ability to influence the real economy through rates (a concept that as Eric Peters pointed out, isn't able to be understood by central bankers), instead the best thing the deputy governor could come up with for a reason is that everyone is doing it. Also of note, the fact that no mention of Sweden's exploding housing prices is mentioned in the inflation discussion is troubling.
Despite negative interest rates and other monetary policy stimulation, inflation is far below target in many countries. Scope for monetary policy seems, quite simply, to be shrinking. The most important reason for this is probably the low global level of interest rates, which has led several central banks to choose unconventional methods with the aim of stimulating the economy and meeting their inflation targets.
Another interesting comment from Skingsley: that central banks are now just playing follow the leader. As the ECB buys everything in sight in its efforts to push rates negative, other central banks need to follow suit or risk, gasp, a strong currency.
But there may arise situations in which these countries' central banks become highly dependent on the actions of larger central banks. Developments in Sweden in recent years provide an example of this. In light of low inflation and inflation expectations that exhibited a falling trend for a time, it has been important to avoid an excessively rapid appreciation of the krona. In this context, it has been vital to follow the ECB's policy, with its comprehensive asset purchases and other measures.
And in the most critical part of the speech, Skingsley says that everyone needs to prepare themselves for new monetary policy, as the policy that everyone is accustomed to won't be able to work in the future. What is that new policy? Helicopter money of course.
Now that Swedish inflation is starting to approach the target, it may be time to think about the conditions for monetary policy over a longer perspective, according to Skingsley. If it has become more difficult to conduct monetary policy, what can the Riksbank and other central banks do?
Skingsley says that it will not be possible, in the future, to conduct monetary policy in the way and with the impact we have previously been accustomed to. And this is something for which we need to prepare ourselves. She notes that, alongside cutting the policy rate to below zero and purchasing securities, so-called helicopter money could provide a hypothetical path to take to increase scope for monetary policy.
"It is probably something that should not be tried until other possibilities have been exhausted. However, considering the difficulties that are weighing many of the world's economies down, I think that it is wise to discuss the different possibilities, without closing any doors," says Skingsley.
We have little else to add to this, except that we have been warning that helicopter money will be coming to a central bank near you ever since inception: it is the terminal endgame of failed monetary policy which started with the Fed launch of QE1. Alas, when the "magic people" have run out of textbook ways to centrally plan the global economy, they have no choice but to eventually resort to bypassing all traditional methods and funding governments and businesses directly.