Who wants free money?

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Who wants free money?

What if money fell from the sky? According to the Bible, a craving for money is the root of all evil. But life tells us that a lack of money lead to many evils too.

Money falling from the sky is actually an economic theory currently under debate as a kind of a last-resort policy or novel alternative to the quantitative easing that no longer is deemed “unconventional” for central banks running out of options to inflate economies mired in a liquidity trap. So-called “helicopter money” is a notion made popular by American economist Milton Friedman in 1969.

The basic principle is to have the central bank temporarily bump up monetary supply as if a helicopter dropped a load of cash from the sky to stimulate spending by both consumer and companies. If people believed this to be a one-time opportunity, they would rush to spend it, and then increased demand would boost inflation. People with extra cash would feel free to spend again, and having the central bank finance the spending won’t dent the government’s balance sheet as would new government debt or tax cuts.

Some economists believe the central banks of the European Union and Japan should seriously consider helicopter money as the cure for economies that continue to shrink despite negative interest rates and heavy bond buying. Their unorthodox program of purchasing government bonds and securities on a large scale to inflate liquidity and monetary policy of charging for bank deposits instead of paying interest through negative rates have had limited effects on the real economy. The central banks are now pressured to experiment with a new notion of handing out checks. It would be extremely tempting for governments that have been restrained by debt loads and deficits to stimulate their economies.

But the notion carries high risks as well. The monetary expansion for spending could bring about short-term effects, but could easily be abused. If money goes to pork-barrel projects run by politicians or to troubled companies, it would only benefit certain classes, and not the most efficient ones.

If increased monetary supply ends up merely stoking inflation without bolstering economic production, real incomes of both salary-earners and people living on pensions would be reduced. If asset prices jumped, so would rents. Bubbles may form. There were many cases where countries suffered killer inflation when the government went on with monetary expansion programs. Many parts of Latin America suffered due to runaway inflation in 1990s. They ended up scrapping their own currencies and employing the U.S. dollar. There is no turning back if a central bank loses sovereignty and credibility in monetary policy.

Korea is by no means in a situation to study the option of helicopter money. It still has the leeway to push down the base rate from the current 2.0 percent. It can try large-scale purchases of government and public bonds and provide selective financing for corporate restructuring. When the global financial meltdown occurred in late 2008, the Bank of Korea lowered the policy rate over six times and bought government bonds. It increased loans to banks to stabilize the bond market and inflate liquidity in banks as well as upping loan ceilings for small and mid-sized companies.

Unless it’s a critical circumstance, the Bank of Korea’s money-printing authority must not be tampered with. The myriad of complexities Korea faces — troubled companies, household debt, youth joblessness, aging of its population and slumping productivity — cannot be solved entirely through monetary means. Resorting to easy windfalls without addressing fundamental problems would only end up aggravating future troubles fand further complicate the problem-solving. Abenomics — a mix of fiscal and monetary expansion in Japan that was supposed to be accompanied by structural reforms — has perfectly demonstrated the limits of monetary stimuli in boosting employment and growth.

The Bank of Korea Law places price stability as top priority for the central bank. The BOK governor took over from the finance minister at the monetary policy committee from 1997 so that the central bank could be entirely committed to that goal. The BOK has been losing confidence due to its frequent errors in economic forecasts and failure to get inflation to its 2-percent target. It is criticized for being too complacent and disconnected from the real economy.

Four out of seven members of the monetary policy committee have been replaced. There are concerns about disagreement on monetary policy due to the mix of newcomers. But if political meddling is held at bay, they will likely do their job. The central bank is the last resort for the economy. The BOK should strive to keep its integrity.

Translation by the Korea JoonAng Daily staff.

JoongAng Ilbo, Apr. 30, Page 27


*The author, a former senior economist at Asian Development Bank, is an economics professor of Korea University.

Lee Jong-wha

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