Central Bank Dividends: A Mechanism for Addressing Effective Lower Bound and Undershot Inflation Targets
A. The Problems
Central Banks currently have two high bandwidth problems with inadequate solutions.
The first problem is how to proceed in a recession when interest rates hit the effective lower bound and stimulus is required but not forthcoming.
The second problem is how to hit stated inflation targets, which have been consistently undershot.
B. Central Bank Dividends
The solution to both problems is Central Bank Dividends.
A Central Bank Dividend is a small sum of money, directly from the Central Bank, targeted to an economic sector. It is not a helicopter drop. It can be social engineering.
C. Examples
1) Hard recession, interest rates hit lower bound, fiscal authorities unwilling to help. Central Bank declares a monthly Central Bank Dividend of ¼ percent of GDP, to be targeted at a different sector each month. In the USA, this is about 40 billion per month.
The Central Bank Dividend, would be divided up with each state getting a portion based upon its population and agreement to distribute the money to the targeted sectors.
In one month, emergency services might be the sector targeted. The next, education. The next, infrastructure and so forth.
The net effect is to keep essential sectors functioning, increase demand and provide a counterbalance to recession. Student grants might increase, roads would improve, water systems would get repaired, emergency services would be well manned and so forth.
2) Economy underperforming, inflation targets undershot. Central Bank declares a monthly Central Bank Dividend of 1/8 percent of GDP, to be targeted at a different sector each month. In the USA, this is about 20 billion a month.
Same effect as above yet attenuated, since there is no emergency and only a small effect is required.
D. Rationale and Implementation
The traditional demarcation of fiscal and monetary responsibilities is that the Central Bank will control the money supply and the government will raise and spend the money as it sees fit. This generally works but can break down when fiscal authorities are unwilling to provide stimulus when needed.
When fiscal authorities are reticent to act, the Central Bank, under the above scenarios, if it is only considering orthodox approaches, is relatively powerless. Yet, the Bank’s mandate, at least in the USA, is to consider the health of the economy.
The implementation of such an unorthodox mechanism would violate the traditional demarcation of responsibilities — as staff economists at the Central Bank chose which sectors to target, a traditionally fiscal authority. This should be considered an improvement — as we deploy more resources on existing problems, they are more likely to be solved.
The psychology of such an unorthodox mechanism must be considered, with clear boundaries on when such a mechanism could be deployed. Those boundaries are the same as the problems above, Lower Bound and inadequate inflation. Such boundaries are obviously implicit but stating them would reassure the skeptical.
The name Central Bank Dividend is appropriate because it is exactly that — a dividend for superior performance. The purpose of every Central Bank is to control inflation and, when it does that well, it could distribute a dividend, just as a regular corporation would when it does well. The psychology of the name will further the acceptance of the mechanism.
E. Social Engineering
The CBD could also be used for social engineering.
For example, if presented with an inadequate birth rate and an aging society, which has been proven to cause slower GDP growth, the Central Bank could target married birth mothers as a sector, offering a sum of money for every birth, over a longer than one month time period, of course. The effect would increase interest rates, demand and social vigour. It would be an excellent investment.
The point is that the only constraint on CBD is the imagination of those creating it.
CBD is a nimble powerful tool that every Central Bank should have in reserve.
