IMF keeps door open to 'helicopter money' to stave off Covid-19 slump

IMF keeps door open to
Christine Lagarde, President of the European Central Bank (ECB). Photo: Getty

The IMF is keeping the door open for governments to pay people directly to prevent the Covid-19 slump becoming something much worse by recommending low-income households get money before unemployment gets a grip on economies.     

In a blog post, staffers John Bluedorn and Wenjie Chen said that the Great Lockdown -- the IMF’s term for the Covid-19 fallout that has sent many economies reeling -- has shown the limits of central bank monetary policy of  cutting interest rates because rates were in many places close to zero going into the pandemic.

It said that the payments to low-income households would be automatically triggered at certain levels of unemployment and would be different for the conventional welfare payments which are triggered only when people have losettheir jobs.

The blog writers note the measures taken by governments around the world to support incomes and fund welfare but believe that in the future governments should be minded to inject payments to insulate demand in economies under future shocks.

They say there is a case for “more automatic stimulus” from governments to sabiliise economic demand by what they call “rules based stimulus measures”.

“Our study shows that rules-based fiscal stimulus measures—such as temporary targeted cash transfers to liquidity-constrained, low-income households that kick in when the unemployment rate rises above a certain threshold —could be highly effective in countering a downturn caused by a typical demand shortfall,” they said in the post. 

“Although these stimulus measures would be automatic, they are very different from traditional automatic stabilisers, which instead respond to an individual’s circumstances (for example, being laid-off in the case of unemployment insurance or lower incomes in the case of progressive income taxes),” they said.

Following the deep economic and political scarring around the world caused by the financial crisis of over a decade ago, the IMF researchers are part of a debate on better ways to stop the boom and bust cycles.

ECB president Christine Lagarde at an early stage of the Covid-19 economic crisis warned that the central bank was at its limits of what it could do to support the eurozone economy and urged European political leaders and the EU to do more by way of spending more.

Mr Bluedorn and Ms Chen at the IMF note the conundrum is fining the best ways for government s to boost demand to insulate economies in future crises “with interest rates at record lows and public debts at historical highs in many countries”.