Wednesday, 19 October 2016

Helicopter money in Argentina

You can't tune in on twitter these past (not so) few months and not read at least something about helicopter money. It is proposed like something novel when in fact it is such a dated practice. It was practices like this that regulators wanted to curb and Central Banks' independence was introduced (it certainly was in Greece's case).

Thing is that people are reading about it and thinking that applying it indiscriminately is something akin to a silver bullet that carries no negative consequences whatsoever.

It is interesting to take a look at the case of a country that continues to apply it like there's no tomorrow, namely Argentina. In Argentina's case National Government's obligations to the local CB (Banco Central de la Republica Argentina) took the form of either the CB buying government securities or (especially during the last few year) the form of transitory overdrafts to the National Government. The last form is what is known as helicopter money. 

Here's is the breakdown. 

source: BCRA

Since, Argentina is an inflationary country in my humble opinion it is more interesting to expand the timeline of the chart above to include the 90s and see it expressed as a % of GDP.

source: BCRA, World Bank, own calculations

I think that now is the time to post the chart of the USD/ARS exchange rate for the same period.


As the chart makes plain to see, during the 90s (the years of the currency board) BCRA kept government financing in check and the currency board arrangement held. After the end-2001 default, government's monetary financing from the CB spiked until end-2004 but then decreased until the end of 2008 and the quasi-peg against the USD was maintained. After that though, monetary financing started to spike again and the USD/ARS exchange rate started to decreciate en cue.

╬čne more point hammered home from the Argentine experience of monetary financing is that once it is initiated as a practice it is difficult to stop. It is stopped only after some (serious) damage is done, if ever. Today's fragile political landscape with populist pressure from all ends of the spectrum mounting, is certainly not one that lends credibility to any notions that helicopter money will, if initiated, be a one-off apparition.

To wrap this up, since 2009 the Peso has depreciated about 77% against the US Dollar. My point is that one has to differentiate. The effects of monetary financing of the government in emerging markets are totally different than those in developed economies with reserve currencies and cannot be proposed lightly. Central Bank independence after all was established for a reason. We don't have to rediscover that reason from scratch.

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