New instruments

I am pleased to read that finally the inadequate set of monetary policy instruments is being talked about at the highest level. On Friday, at the Jackson Hole conference of central bankers, Yellen stated that since the equilibrium rate is a lot lower than earlier, around 3 per cent, if difficult times come again to the economy, there will not be enough margin to decrease interest rates. It means that there will not be enough stimulus available.

Otherwise, I discussed this two years ago, in my article titled Decline of the interest era.

Yellen also mentioned that the new instruments deployed during the Great Recession (printing money combined with asset purchases) were useful, and very probably they were not used for the last time. In my opinion, their use is rather debatable (I discussed this in my paper Helicopter money), but I suspect that Yellen is not completely satisfied with them either. Obviously, in his position he was not able to state that they perform badly (even if they helped to avoid the greatest disaster). He closed his speech by claiming that new instruments are required in monetary policy, on which research and debate should be started. He would not have said this if he was fully satisfied with the ones existing so far.

In the meanwhile, Finland is introducing a basic income as a pilot. This is not by accident: due to automation, masses will lose their jobs, and this process is going to start within a few years. What is more, people will have no chance of getting back into the labour market, therefore separating work from income generation will be unavoidable. Finland is an example of how the most developed countries have started to prepare for the new world.

Hopefully, decision makers will notice sooner or later that the idea of linking basic income and monetary policy is worth it, if not essential. An excessive increase in basic income, financed by fiscal policy, will be an eternal temptation for politicians; however, in this manner they risk an excessive growth of government debt and inflation. As a counterbalance, a monetary basic income set by the independent central bank could be introduced, which could be positive (today it is called helicopter money), but also negative. And this is precisely the trick. If the central bank can see that the inflation target is in danger due to increasing prices, then it applies a negative monetary basic income, i.e. it deducts from the fiscal income due to everybody. And this can be used to prevent politicians’ popularity-seeking.

At the same time, in this system there is no limit for monetary policy in terms of stimulus, which is the zero (or slightly below zero) interest rate in the current system. If the fiscal basic income is not sufficient to boost the economy, there is a threat of deflation and in the meanwhile government debt is also worsening; the population can be provided with money printed without collateral. I.e. fiscal basic income can be supplemented by monetary basic income. As a response, the economy and inflation will boot up, but government debt remains under control.

I have already explained the concept of the dual level basic income. Of course it is obvious that this cannot be implemented soon. It is also unclear what traps this idea may lead to. That is why research should start today, to have an answer ready when it becomes an issue. The concept of the dual level basic income should certainly be on the list of new monetary policy instruments Yellen is looking for.

Original date of Hungarian publication: August 20, 2016