Are quantitative easing and helicopter cash really different tactics? And how does QE relate to Modern Monetary Theory?

I just want to discuss this from the MMT perspective, since that was a sub-part of the question.

• “Helicopter money“ is the alleged distribution of money by central banks to the public. This is outside the legal mandate of most central banks. Generally, economists refer to “money-financed fiscal stimulus,” which is normally thought of as the central bank buying government bonds in the primary market (at “auction”).
• QE is the central bank buying anything - normally bonds - in the secondary market. This is designed to grow the balance sheet.
• There are a variety of MMT proposals, but they have a common element of suspending bond issuance. The simplest suggestion is for the fiscal arm of the government to run an overdraft at the central bank. This is almost functionally equivalent to “money-financing.” The difference is that if the central bank buys bonds, it can sell them in the secondary market, while an overdraft balance is not a transferrable asset.

This paper by L. Randall Wray discusses central bank independence, and notes that using an overdraft is equivalent to purchasing in the primary market: Link Note that having the fiscal arm of government run an overdraft at the central bank used to be standard procedure in some countries (e.g., Canada), but it was Largely discontinued due to fears about “money printing.”

With respect to the sub-questions in the MMT section.

• Running an overdraft at the central bank is like running an overdraft at a private bank; it creates assets/liabilities equally.
• Buying bonds in the secondary market is largely a waste of time from the perspective of MMT. The key difference is that secondary market purchases leave open the possibility of auction failures.

What is QE:

QE is simply an asset purchase by central bank. As explained by Fed St. Louis QE is defined as:

large-scale asset purchases—in the hundreds of billions of dollars range—of, for example, mortgage-backed securities and Treasury securities.

Furthermore, under QE this is done with newly created reserves. Generally these assets are actually not government assets (i.e. bonds) but rather the assets of banks (although they can be government assets as well).

The idea of QE is to basically make an asset swap - a swap of central bank's reserves for some assets of banks which make them reluctant to borrow more (for example the first QE Fed did focused heavily on mortgage based securities - which were at the heart of Great Recession - as it was argued that banks were reluctant to borrow more while holding them). Later QE's also included treasury bonds and other more safe long term debt. This is not printing money, but to the extent it encourages new borrowing it increases the money supply so the money printing analogy has some measure of merit in it.

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Answer 1

Some sites describe 'helicopter cash' as an alternative to QE. That conflicts with the above understanding of QE as a way of raising funds, not of spending them. Under my understanding, one might do QE in order to finance a helicopter cash strategy.

Yes 'helicopter cash', or more correctly helicopter money is an alternative to QE. QE is an asset purchase program. Helicopter money just literary means giving away cash/deposits to people. The term originated from Milton Friedman's quip that in this case central bank might as well be literary dropping money out of helicopter. Helicopter money does not require any asset purchase from central bank. Central bank can as well just send every household a check or directly deposit the money into their account.

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Answer 2

Some sites say the aim of QE is to lower interest rates, while other sites (and sometimes even the same sites!) say that QE is used when lowering interest rates has ceased to have any effect on economic activity. One of these must be incorrect. Under my understanding, the first is incorrect.

No both are correct and you are misunderstanding what they are saying. There are multiple interest rates in the economy. QE is used when Federal Reserve cannot bring down further its federal funds rate - when it hits zero lower bound. However, as explained in the same Fed St. Louis document I linked at the beginning, the aim of QE is to bring down interest rates on long term treasury securities and other financial instruments. Those are completely different interest rates than the one which makes QE necessary. Even if federal funds rate is 0 long term treasury rate or corporate bond rate might be positive.

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Answer 3

No, open market operations and QE are different although the difference is subtle. Investopedia has an excellent article on the difference between the two, here is short summary (but I recommend reading the full Investopedia article):

Open market operations are a tool the Fed can use to influence rate changes in the debt market across specified securities and maturities. Quantitative easing is a holistic strategy that seeks to ease, or lower, borrowing rates to help stimulate growth in an economy. Open market operations can be an important tool used in seeking to obtain the goals and objectives of quantitative easing.

Basically, open market operations is much narrower term, while QE is wider term and when central banks execute QE it might be partially done through open market operations.

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Answer 4

QE is an asset purchase program, hence it will always involve a debt. However, central banks are part of the government. All profits including the profits from interest on government bonds are sent back to government (after cost of running the central bank is deducted see this previous Q and A about Fed profits - other central bank might have different institutional arrangement but the profits end up at the government).

Also it is technically possible for central bank to just 'scrap' the bonds after purchase, saying government never has to pay it back and giving up any claims to gov. revenue those bonds give central bank. Nonetheless, doing so would represent permanent increase in money supply and most central banks would probably think twice before going this route.

Does that mean that QE could not be regarded as a MMT-oriented activity?

I dont think this can be answered. There is no single formal modern monetary theory (MMT). MMT lives, for most part, in blogosphere not in actual research papers and with every new book on MMT new/different things are claimed about it so there is too much inconsistency to say what is consistent and what isnt with it. As far as I understand from what I have read about MMT central bank purchasing bonds from government would be in view of MMT just an accounting trick and equivalent to directly funding government spending as long as central bank commits not to cash those bonds, but keep all the caveats mentioned in preceding sentences in mind.

Edit in Response to Brian's answer

For example, this blog on MMT says:

It should be noted that QE is conceptually different from MMT, although both involve central bank purchases of government bonds. Under QE, the expectation is that the central bank will sell the government bonds it buys before they mature, so that the government will need to raise money (ultimately through taxes) to pay its debt to private holders of that debt. Effectively, central bank assessments of a temporary need for money-creation to address short-run economic circumstances have driven QE.

Hence the blog claims if assets are purchased without intention of them to be sold later then QE is consistent with MMT as I mentioned above in my answer.

However, an important caveat to the reader here is that does not automatically means that Brian's answer is incorrect (apart from the part arguing this answer made incorrect assertions) - MMT has no definitive agreed upon version of a theory as mentioned before. However, saying that this answer misrepresented view of MMT is itself not correct as this answer both cautioned that people dont even agree on what MMT is and as the quote above shows clearly under some MMT views QE is consistent with MMT as long as central bank does not intend to reverse the bond purchase.

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Answer 5

QE and any other monetary policy differs from mere deficit spending (i.e. fiscal policy) tremendously. From macroeconomic perspective the goal of monetary policy is to stimulate economy through changes in the money supply, which in turn affect interest rates and prices in economy. Fiscal policy tries to stimulate economy directly through government spending.

Furthermore, fiscal policy might be conducted even when central bank does nothing and vice versa monetary policy can be conducted even when government does not makes any changes in its fiscal policy or even if government does not have any net debt. In general monetary policy and fiscal policy are macroeconomically different on fundamental level (but this answer is already way too long to go into any further details on these differences but you can consult any standard macro textbook - if you are layman Blanchard et al. Macroeconomics: an European Perspective is excellent source targeted at undergraduates so you wont get yourself lost. If you want something more involved and nuanced then Romer's Advanced Macroeconomics is the book to learn intermediate macro from).