In response to the COVID-19 pandemic, the Bank of Canada has cut the overnight rate to 0.25 percent, the threshold it sees as the lower bound for its main policy instrument. At the lower bound, the Bank can no longer use its most direct tool to influence economic activity. The federal government has simultaneously engaged in unprecedented fiscal policy action, running record deficits to bridge households and businesses through the crisis. These deficits have added greatly to public debt, leading to questions as to the limits of future fiscal policy. As a result, the question of whether central banks should have a more direct way of delivering economic stimulus arises. Broadly speaking, the Bank of Canada can go direct in two ways. One way is to transfer extra funds directly to the general public – often described as a “helicopter drop”: “cash” is printed and dropped onto people as transfers – a one-for-one, dollar-for-dollar combination of monetary policy and fiscal transfer. Another option is through a standing facility at the Bank of Canada. In this case, the government could still make transfers to people, but their delivery would be called for and facilitated by the Bank, which would promise to accept any newly issued debt from the government to temporarily finance these transfers. The end result, however, theoretically would be the same as the “helicopter drop”: an increase in the money supply through direct transfers initiated and facilitated by the Bank. This would foster aggregate demand and, thus, inflation at the right time. In our view, “going direct” would open the door to political interference with monetary policy, even under a well-designed system. Furthermore, it is not clear what the benefits would be relative to other monetary policy options, such as forward guidance, that promises to keep interest rates low for long, or quantitative easing that flattens the yield curve across different assets. Inflation control is one of the biggest achievements of economic policy in Canada over the past quarter century. The general public understands the job of the Bank of Canada. That might change fundamentally, however, if people receive a cheque in the mail from the government that they know has been enabled solely by the Bank of Canada’s balance sheet magic. In Canada, we have grabbed the tiger by the tail. Why involve politics once again if doing so risks the tail slipping away
