Reviving the potency of monetary policy with recession insurance bonds

Julia Coronado () and Simon Potter
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Julia Coronado: Macropolicy Perspectives

No PB20-5, Policy Briefs from Peterson Institute for International Economics

Abstract: In the second part of their Policy Brief, Coronado and Potter discuss how the system of digital payment providers (DPPs) proposed in their first Policy Brief on this topic adds a new weapon to the monetary toolkit that could be implemented in a timely, effective, and inclusive manner. They describe how a digital currency backed by the Federal Reserve could augment automatic fiscal stabilizers and--more importantly--harness the power of "helicopter" money or quantitative easing directly to consumers in a disciplined manner. To implement QE directly to consumers, Coronado and Potter propose the creation of recession insurance bonds (RIBs)--zero-coupon bonds authorized by Congress and calibrated as a percentage of GDP sufficient to provide meaningful support in a downturn. Congress would create these contingent securities; Treasury would credit households' digital accounts with them. The Fed could purchase them from households in a downturn after its policy rate hits zero. The Fed’s balance sheet would grow by the value of RIBs purchased; the initial matching liability would be deposits into the DPP system. The mechanism is easy for consumers to understand and could boost inflation expectations more than a debt-financed fiscal stimulus could.

Date: 2020-04
New Economics Papers: this item is included in nep-cba, nep-ias, nep-mac, nep-mon, nep-ore and nep-pay
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