## 3.1 Evidence from the MPC literature, survey data, and Ricardian considerations

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### Evidence on marginal propensity to consume (MPC) from fiscal transfers
- Studies of lump-sum fiscal transfers find sizable impacts on household spending in economies hit by negative demand shocks.
- Parker et al. (2013): estimate an MPC of between 0.5-0.9 within the first two quarters of receipt, increasing further in following months.
- Agarwal and Qian (2014): detect an MPC of 0.8 over the first 10 months in response to an exogenous cash transfer in Singapore, mainly driven by liquidity constrained households.
- Empirical evidence for Ricardian behaviour by households in response to fiscal policy changes is not strong (Romer, 2009).

### Survey evidence on direct transfers from the central bank
- Djuric and Neugart (2017), representative panel of 5,000 German households:
  - Spend about 38% of a direct transfer from the central bank in the same period.
  - Use 19% to pay down debt.
  - Save the rest.
- van Rooij and de Haan (2016), representative panel of 2,000 Dutch individuals:
  - Find comparable spending results.
  - Helicopter money would decrease trust among 18% of respondents; purchases of public and corporate debt or negative interest rates on saving accounts would decrease trust among 23%, 30%, and 50% respectively.
- ING (2016), survey across 12 euro area countries (12,000 participants):
  - 54% of respondents would perceive direct transfers favorably.
  - 14% would be skeptical.
- Survey data does not suggest significant Ricardian effects; spending behaviour is comparable to tax rebates or direct cash transfers from government.

### Ricardian considerations and theoretical complementarities
- OT liability on the central bank balance sheet is described as a permanent liability akin to a perpetual bond remunerated at the prevailing short-term interest rate on excess reserves.
- Effectiveness of OT in t=0 is irrespective of whether the central bank intends to keep the liability forever; future servicing costs are state-dependent and arise only if the policy measure boosts nominal GDP at the ELB.
- Ricardian effects are attenuated because the NPV of future seigniorage is endogenous to OT implementation timing.
- Gali (2020) (New-Keynesian DSGE): even with fully Ricardian households, helicopter money (money-financed tax cut) has a positive effect on aggregate demand and welfare due to nominal price rigidities; private net wealth increases in both nominal and real terms as prices take time to adjust.
- Benigno and Fornaro (2018), Buiter (2014), and Jorda et al. (2020): theoretical and empirical evidence that aggressive interventions and monetary non-neutrality (including hysteresis effects) can shift growth expectations and have persistent impacts.

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### 3.2–3.5 (Summaries): Spillovers, calibration, distributional design, and implementation

### Positive spillovers and intra-currency-area rebalancing
- OT increases domestic demand; part flows into imports, producing positive spillovers within and outside a currency area.
- OT is most impactful where macroeconomic policy support is needed most; regions hardest hit likely have higher MPCs and thus spend a larger share of the transfer.
- In less-affected regions, more of the transfer will be saved; spending there has greater impact on nominal price and wage growth relative to regions with larger negative output gaps, supporting competitiveness and rebalancing.
- QE is characterized as a blunt tool that depresses yields across a currency area and may disproportionately boost regions already doing relatively well; QE partly works through the exchange rate channel and may widen global imbalances.
- Exchange rate effects of OT are ambiguous; in the euro area OT would likely reduce its current account surplus (notably in countries such as Germany); in currency areas with current account deficits (e.g., the U.S.), the deficit would tend to widen.

### Magnitude, calibration, and accounting (illustrative back-of-the-envelope)
- To boost nominal GDP by ca. 1% (e100 billion) in the euro area:
  - Requires a transfer of ca. e460 to every adult citizen (ca. 270 million) under baseline assumptions of an MPC of 0.8 (over four quarters) and a multiplier of 1.
  - If citizens under age 18 are included (total recipients around 340 millions), the individual transfer reduces to ca. 370e.
  - Comparable estimates: e385 per person (including children below age 15 with a weight of 50%) to generate a 1% boost to nominal GDP, half attributable to inflation.
  - Muellbauer (2014) suggested e500 per adult in the euro area.
- Under this example:
  - Transfers would require a permanent increase in central bank money of around e125 billion.
  - e125 billion is less than 1.5% of the Eurosystem’s October 15, 2021, balance sheet size of e8.337 trillion.
  - e125 billion is about 5x the Eurosystem’s average yearly seigniorage of ca. e25 billion; reduction in central bank equity could be replenished within five years with current annual seigniorage alone (all else equal).
- Calculation assumptions and caveats:
  - Assumes 270 million eligible recipients (adult population).
  - Assumes no leakage of the stimulus to imports for simplicity.
  - MPC of 0.8 over four quarters consistent with literature cited in Section 3.1.

### Distributional considerations and transfer options
- Monetary policy entails redistributive consequences; policy should achieve its mandate while minimizing redistributive impact, leaving active redistribution to governments.
- Transfer design options:
  - Equal-size transfers:
    - Equal absolute amount to every citizen reduces relative inequality; progressivity can be introduced by taxing transfers at individuals’ marginal tax rates under existing progressive tax schedules.
    - Unless exempted, OT provides an additional source of tax revenue to governments.
  - Transfers according to capital key (euro area):
    - Allocates transfers across member states according to capital key (population size and GDP equally weighted).
    - Economically stronger countries get relatively higher per capita OT share; adjustments by national consumer price levels possible.
    - May attenuate OT’s rebalancing effect and increase complexity and political risk.
  - Means-tested transfers:
    - Target higher-MPC lower-income households; require cooperation from fiscal authorities and tax agencies and raise organizational and data privacy challenges.
    - Fiscal policymakers are better placed for targeted redistribution via tax progressivity and social services.

### Practical implementation options
- Checks and CBDC:
  - Sending checks operationally similar to government transfers; names/addresses from electoral registers.
  - Recipients deposit/cash checks at commercial banks; banks credited in central bank money (reserves) upon delivering the check.
  - A centralized digital register could track payments; national/regional central bank branches could cash checks directly.
  - CBDC would facilitate delivery and near-real-time provision/withdrawal of central bank money but raises infrastructure and financial stability challenges beyond this paper’s scope.
- Perpetual targeted long-term refinancing operation (PTLTRO):
  - Central bank provides perpetual zero-coupon loans to banks on condition identical loans are passed to households, akin to TLTRO.
  - Requires a centralized electronic loan register for monitoring and preventing abuse.
  - Banks may need financial incentives (e.g., commission or administration fee capped by the central bank at a few basis points, deducted up front).
  - After liftoff from the ELB, reserve remuneration scenarios (including higher non-remunerated minimum reserves) can preserve central bank policy solvency.

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### 3.6 Accounting for OT on the central bank balance sheet

### Nature of the OT liability and accounting implications
- OT creates a new liability in the form of reserves; this liability is perpetual by nature as no corresponding interest-bearing asset is acquired to offset reserves.
- To balance books after OT, the central bank can:
  - Book an instantaneous loss to equity, potentially leading to negative equity, or
  - Create a matching non-interest-bearing asset (e.g., related to a PTLTRO or deferred seigniorage asset).
- Standard accounting rules imply:
  - A perpetual zero-coupon bond would be valued at mark-to-market value of zero.
  - Central bank cannot circumvent recognizing a loss to equity following OT.
  - Booking a corresponding deferred asset may be preferable to reporting negative equity because it creates a standalone balance-sheet position, is traceable, and may facilitate public communication.

### Stylized balance-sheet effects (central bank, commercial banks, households)
- Central bank (after OT) — assets include Claims on MFIs, FX Reserves, [Perpetual TLTRO* or Deferred Seigniorage Asset], Government Bonds, Other claims, Revaluation accounts; liabilities include OT / PTLTRO (CiC and bank reserves), Currency in circulation (CiC), Bank reserves, Other liabilities, Loss on capital and reserves ("equity"), CLAC**.
- Commercial banks:
  - OT causes balance-sheet extension: both deposits and reserves increase by the same amount.
  - Initial effect on banks’ income is broadly neutral; can change with interest rate dynamics and reserve remuneration policy.
  - Bank assets may show OT Reserves* (remunerated at policy rate on deposits or rate on minimum reserves), Excess Reserves**, Minimum Reserves***.
- Households:
  - OT via checks or PTLTRO increases net wealth for each citizen in equal magnitude, corresponding to decrease in central bank net wealth.
- Contrast with QE:
  - QE does not mechanically alter net wealth of sectors but affects wealth through second-round price effects, impacting households heterogeneously.

### Options to address negative equity and intertemporal choices
- Central bank choices:
  - Keep negative equity or matching asset indefinitely; moderate OT amounts would likely not impinge on ability to control inflation.
  - Reduce liabilities via sale of other assets.
  - Eliminate OT liability over time using future seigniorage; involves intertemporal seigniorage distribution choices.
- Legal/institutional examples:
  - ECB Article 33: losses may be offset against the general reserve fund and, if necessary, against monetary income of the relevant year; losses not covered in a given year can be offset with future seigniorage.
  - Federal Reserve: realized losses booked as deferred asset and remittances to Treasury suspended until recouped with future earnings.
  - Profit/loss sharing arrangements can create economic and political instability risks under QE; OT pools risks across a currency union.

### Assessing loss-absorption capacity — Eurosystem example and key figures
- Conventional loss absorption capacity (CLAC) of the Eurosystem (consolidated) as of end-2020:
  - CLAC ≈ e622 billion.
  - CLAC components: capital and reserves e109 billion; revaluation accounts e512 billion (text; Figure reports EUR 513 bn).
- Non-inflationary loss absorption capacity (NILAC):
  - NILAC includes currency in circulation and discounted future seigniorage gains.
  - Using conservative assumptions: annual seigniorage growth 1% and discount rate 2% (in line with target inflation):
    - Annual seigniorage flow in 2020: around e25 billion.
    - NPV of future seigniorage: around e4.5 trillion (figure component reported as EUR 2500 bn under S/(i-g) with S=25, i=0.02, g=0.01).
  - Currency in circulation (2020 eop): EUR 1435 bn.
  - NILAC/CLAC ratio: around seven (close to Buiter and Rahbari (2012) estimates).
- Figure 6 components labelled:
  - Outright Transfer (calibrated), EUR 125 bn.
  - Capital and Reserves, 2020 eop, EUR 109 bn.
  - Revaluation Accounts, 2020 eop, EUR 513 bn.
  - Currency in Circulation, 2020 eop, EUR 1435 bn.
  - NPV Seigniorage (est.), S/(i-g), S=25, i=0.02, g=0.01, EUR 2500 bn.

### Negative central bank equity and policy solvency — theory and evidence
- Theoretical:
  - A currency-issuing central bank can never be financially insolvent since liabilities can always be serviced, but a strong balance sheet supports policy solvency (ability to control inflation).
  - With large excess reserves tied to deposit rates, central bank may have to raise deposit rate and incur remuneration costs.
  - Policy solvency requires covering operational and policy operation costs via seigniorage profits; otherwise printing money may impede contractionary policy.
  - Negative equity is not dangerous per se but problematic if it follows an explosive path; intertemporal solvency constraints illustrate when policy solvency can be retained despite large negative equity.
  - Public confidence and expectations matter; strong balance sheets provide margin of safety.
- Empirical:
  - Negative equity poses risks if it approaches or exceeds NILAC; absent fiscal recapitalization this could lead to loss of confidence, excessive money growth, and currency crisis.
  - Historical failures: Weimar Republic, Zimbabwe, Venezuela.
  - Historical prolonged successful operations with negative equity: Chile, Israel, Czech Republic, Canada (1935-1975).
  - Bundesbank example: operated effectively with negative equity for many years; booked a claim on government remunerated at 1% p.a., amortization slated to begin in 2024; government assumed costs via "Ausgleichsfonds Währungsumstellung" ≈ ca. e30 billion in 1994.
  - Literature citings:
    - Bindseil et al. (2004): negative central bank equity at varying levels does not impinge on ability to control interest rates, though strong balance sheets advisable for political economy reasons.
    - Adler et al. (2016): suggests negative link between central bank financial strength and inflation control performance.
    - Hampl and Havranek (2018): meta-analysis finds the nexus not particularly strong.
    - Benecka et al. (2012): detect strong non-linearities driven by financially weak outliers.

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### 4.4 OT vs. QE effects on balance sheet strength, seigniorage, and ease of exit

### Balance sheet trade-offs and seigniorage implications
- OT creates an unmatched liability and an instantaneous reduction in central bank equity; magnitudes in Section 3.3 constitute a small fraction of NILAC and "the expected losses on equity resulting from the newly created and unmatched reserves would not present material risks to policy solvency."
- Long-run GE effects of OT could be positive via faster recovery, higher real money demand, and greater seigniorage.
- Seigniorage is endogenous and hard to forecast; in "normal" pre-crisis times seigniorage tends to increase with nominal GDP growth given an upwards sloping yield curve.
- It is not clear a priori whether OT’s up-front reduction in equity outweighs costs and risks of large-scale asset purchases (QE) in terms of NPV of future seigniorage for a given stimulus.

### Stylized comparison (calibration to deliver 1% boost to nominal GDP)
- Calibration:
  - OT: e125 billion of direct transfers.
  - QE: e1,500 billion of asset purchases (around 15% of GDP).
- Starting deposit rate: -0.5%.
- QE portfolio assumptions:
  - Weighted average maturity: 8 year.
  - Average return: 0%.
  - Zero-coupon bonds (duration = weighted average maturity).
  - Parallel shift of yield curve following increase in deposit rate by same amount.
  - No reserve tiering or new net asset purchases assumed.
- Stylized year-1 results following an increase in the deposit rate:
  - OT:
    - Upfront non-recurring loss: e125 billion.
    - Recurring reserve remuneration costs: range from -e0.6 billion p.a. (for deposit rate of -0.5%) to e3.1 billion p.a. (for deposit rate of 2.5%).
  - QE:
    - No upfront cost initially, but:
      - Recurring reserve remuneration costs: range from -e7.5 billion p.a. to e37.5 billion p.a.
      - One-off valuation (unrealized) losses: range from e0 billion to e316 billion.
    - Valuation losses may be avoided if assets held to maturity but still booked against revaluation accounts or equity.
- Interpretation:
  - QE expands the balance sheet by more than an order of magnitude relative to OT for the same nominal GDP impulse, increasing interest rate risk and exit difficulty.
  - OT is more costly up-front but less risky over time, easier to calibrate, and more transparent regarding balance-sheet consequences.
  - Tradeoff depends on yield curve shape and asset purchase amount; dynamic comparison across business cycle position and yield curve recommended for future research.

### Preserving policy solvency: reserve requirements and remuneration
- Policy options when tightening is warranted:
  - Adjust forward guidance and reduce balance sheet via open-market operations to mop up liquidity (induces yield curve steepening).
  - Raise deposit and lending rates (creates large costs given expanded balance sheets).
- Tiering reserve remuneration in upswing:
  - Allows newly created reserves to be remunerated at zero or below policy rate.
  - Requires adjusting minimum reserve requirements (MRR) upwards to anchor interbank rates near deposit rate on excess reserves.
  - Central bank may remunerate all minimum reserves or just fraction attributable to OT at below policy rate.
- Historical practice:
  - Advanced economies moved away from active reserve requirements since early 1980s; emerging markets (e.g., China) still use them actively.
- Costs and distributional considerations:
  - Using reserve requirements and (non-)remuneration imposes a tax on the banking sector that could be passed to customers, amplifying contractionary effects.
  - Given implicit transfers from ECB tiering and TLTRO III to banks, tiering reserves in the opposite direction during recovery may be justifiable.
- Fiscal interactions:
  - Solvent fiscal authority could recapitalize central bank, but may not be realistic.
  - OT and tiering expand options to smooth the intertemporal consolidated budget constraint of the state.
- Banking sector and GE effects:
  - In a cyclical upswing enabled by QE/OT, banks better positioned to absorb tiering costs due to higher credit volumes, lower NPL ratios, increased net interest margins from steeper yield curve.
  - Net effect on bank profitability and financial stability may be positive depending on tiering calibration; full GE cost-benefit analysis recommended.

### Quantitative examples and comparative costs to the banking sector
- OT creates far fewer new reserves than QE for the same inflation impact; costs to banking sector from reserve tiering would be much smaller.
- Examples:
  - If e125 billion in OT is fully tiered, annual cost to banking sector would be e2.5 billion for an interest rate differential between required and excess reserves of 200 bps.
  - Eurosystem banks’ interest rate expenditures on excess reserves were lowered by close to e5 billion between October 2019 and December 2020 due to current tiering (Deutsche Bundesbank, 2021).
  - TLTRO III example: direct transfers to banks could amount to an annual subsidy of around e11 billion for an outstanding volume of e2.2 trillion and an interest rate differential of 50 bps if all banks satisfy the lending target (Da Silva et al., 2021).

### Conclusions and policy implications (from Section 4.4)
- OT should be strictly limited to exceptional circumstances when conventional levers are exhausted and fiscal policy cannot provide needed support.
- For moderate negative central bank equity well below NILAC, policy solvency is unlikely to be at risk; risks can be addressed via judicious tiering of reserves.
- Tiering can help rebuild central bank equity faster, avoid explosive negative-equity dynamics, and provide greater policy space—while weighing costs imposed on banking sector and customers.
- Policy solvency for moderate negative equity is ultimately a policy choice of the central bank.

---

### 4.6 Fiscal and structural policies to support price stability

### Rationale for fiscal and structural policy use
- Interest rate hikes, asset sales, or raising reserve requirements are "rather blunt tools" with individual drawbacks and may be inappropriate when price pressures are primarily non-monetary.
- Non-monetary drivers include:
  - supply chain disruptions,
  - real private and public underinvestment,
  - corporate market power,
  - pandemic-related sectoral reallocations from services to goods,
  - one-off fiscal support measures,
  - trade barriers,
  - regulations.
- Fiscal and structural policies can reduce inflationary pressures and increase potential output in a "more growth-friendly and equitable" manner.

### Examples and fiscal tools
- Semiconductor shortage:
  - 2021 shortage had large effects on car and consumer good prices; partly attributable to high demand from cryptocurrency mining leading several countries to ban crypto mining.
- Housing:
  - Imputed rents from owner-occupied housing rose with housing prices.
  - Policy responses: expand housing supply, tighten macroprudential tools while exempting first-time buyers.
- Fiscal tools to remove money from circulation:
  - Levy higher taxes and pay down debt to reduce purchasing power.
  - Progressive taxation reduces disinflationary impact because high-income earners have lower MPC, but may ensure fair burden-sharing.
  - Contain current expenditures on items with low multipliers to attenuate inflation without strong adverse growth effects.
- Medium-term targeted public policies:
  - Promote efficient allocation, competition, innovation, and strategic investments to address supply bottlenecks and market failures.

### Fiscal theory of the price level (FTPL) and policy mix
- FTPL perspective:
  - Expansionary fiscal policy (or OT) can help achieve price stability at the ELB; contractionary fiscal policy should help when economy overheats.
- Optimal mix of fiscal, structural, and monetary policies should be country-specific and account for tradeoffs.

---

### 6.1–6.3 Central bank independence, institutional legitimacy, and legal considerations

### Central bank independence concerns and safeguards
- Critique: direct transfers could create expectations of repeated use, endangering independence and mandate fulfillment; same logic applies to any policy (rate cuts, asset purchases) that affects government refinancing costs.
- OT would help attenuate fiscal dominance risks vis-à-vis other ELB instruments (see Section 5.3).
- Institutional safeguards (independent decision-making) and a strong central bank balance sheet that does not require fiscal support to avoid breaching NILAC support independence.
- For reasonable OT calibrations, central bank would not approach NILAC limits (see Section 4.2).
- Adherence to prudent and transparent accounting standards (Section 3.6) is essential to preserve public trust.

### Rules, conditionality, and communication
- OT should be clearly communicated as an extraordinary ELB measure.
- Volume and potential future OT rounds should be strictly conditional on inflation dynamics, possibly via pre-determined quantitative thresholds.
- Example rule: "Sahm" rule (Sahm, 2019) — automatic cash transfers when three-month moving average of unemployment rate increases by 0.5 percentage points or more over its trough in preceding twelve months.
- As economy lifts off from ELB, OT would no longer be needed and central bank could revert to traditional tools.

### Institutional legitimacy and attenuation factors
- Core critique: OT lies outside eligible monetary policy instruments and may be viewed as fiscal policy; politically controversial and legally exposed.
- Factors attenuating legitimacy concerns:
  - (i) Redistribution is fiscal prerogative; OT preferable to QE because redistributive consequences are more neutral and less opaque.
  - (ii) Every monetary policy has fiscal consequences; OT’s direct loss to equity is contrasted with QE’s opaque and uncertain losses.
  - (iii) Some central banks already use measures benefiting specific groups (e.g., BoJ equity purchases, ECB tiered remuneration).
  - (iv) Major advanced-economy central banks operate with accountability and legal reporting requirements.

### Legal foundation and euro-area specifics
- Central banks can only act as authorized by law ("legality" principle); laws should provide explicit or implicit powers to conduct OT.
- ESCB/ECB Statute: Article 18 allows open market and credit operations; Article 20 allows "other instruments of monetary control" via exceptional Governing Council procedure. Vagueness of Article 20 leaves ambiguity on whether it covers OT (direct permanent increase of base and broad money).
- Former ECB officials described OT as "interesting concept" with legal/accounting complexities but noted the ECB "can issue currency and (...) distribute it to people" as an "extreme sort of instrument."
- OT would not violate monetary financing prohibition in the Statute (Article 21), contrary to some proposals elsewhere.
- Article 2 tasks ESCB with maintaining price stability and, without prejudice, supporting general EU economic objectives including cohesion and solidarity; Article 2’s efficiency-of-resource-allocation language may favor OT over QE economically.
- Legal risks:
  - Court case against OT likely; ECJ ruling may be required to resolve Article 20 ambiguity.
  - Monetary financing prohibition and quantity/time limits relevant to asset purchase litigation would not apply to OT.
  - OT could allay German Constitutional Court concerns about proportionality and distribution because redistributive effects and financial stability risks are minimized.
- Direct transfers are already de facto in the toolkit via tiering and TLTRO III, which lower Eurosystem remittances and are more opaque and less equitable than OT.
- Article 19 explicit on reserve requirements: ECB may require credit institutions to hold minimum reserves.

### Legislative endorsement recommended
- Legislative endorsement and central bank law amendment desirable to remove legal uncertainties and specify OT conditions and safeguards against abuse, akin to laws allowing central banks to provide credit to the government under certain conditions.

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### 7 Conclusion — key findings and policy recommendations

### Key findings
- At the ELB, well-calibrated OT to households would be an equitable and effective monetary policy tool to achieve price stability and stimulate aggregate demand.
- OT would be superior to asset purchases and negative interest rates in both achieving price stability and stimulating aggregate demand.
- OT would automatically provide stronger policy support in regions of a currency area hit harder due to heterogeneous MPCs, contributing to internal and external rebalancing.
- Operationalization: physical checks, CBDC, or perpetual zero-coupon targeted long-term lending operations, leveraging existing infrastructure.
- Costs: direct transfers create an unmatched central bank liability and instantaneous equity reduction, creating policy solvency risk if taken to unsustainable levels.
- Prolonged large-scale QE carries similar equity risks, exacerbates wealth inequalities, relies on credit creation, distorts relative prices, and raises fiscal dominance concerns.
- For moderate and carefully calibrated OT amounts, strictly conditional on inflation dynamics, policy solvency risk appears small in reserve-currency issuing economies with strong institutions and safeguards.
- OT is appropriate for stagnation traps with sizable slack and depressed interest rates; targeted fiscal measures that are means-tested and raise productive capacity are preferable if feasible.
- OT differs from debt-financed fiscal stimulus: central bank liability is state-contingent, not subject to rollover risk, and pools risks across fiscal entities of a currency area—potentially welfare-improving for unions lacking central fiscal capacity.
- OT reduces rather than increases fiscal dominance risks relative to secondary-market asset purchases.
- Legal prohibition: money-financed fiscal stimulus is legally prohibited in the euro area without fiscal policymakers' cooperation even if permitted.
- If premature fiscal consolidation repeats post-GFC mistakes, direct central bank transfers to households would be a powerful toolkit addition to achieve objectives effectively and equitably.

### Policy recommendations (summarized)
- Restrict OT to exceptional circumstances when conventional levers are exhausted and fiscal support is unavailable.
- Calibrate OT conservatively (example: e125 billion to deliver ca. 1% nominal GDP boost under MPC 0.8).
- Preserve transparency and adhere to prudent accounting standards (deferred asset vs. negative equity communication).
- Use tiering and reserve-tool options to preserve policy solvency during liftoff, weighing banking sector costs.
- Favor legislative endorsement or explicit legal backing to remove ambiguity and set safeguard conditions.
- Prioritize targeted fiscal and structural measures where politically and economically feasible; use OT as complement or backstop when fiscal support fails.

*Source: wpiea2022087-print-pdf — Advancing the Monetary Policy Toolkit through Outright Transfers (Working Paper No. WP/2022/87)*

### 3.1  Evidence from the MPC literature, survey data,

### 3.1  Evidence from the MPC literature, survey data, and Ricardian considerations

### Evidence on marginal propensity to consume (MPC) from fiscal transfers
- Studies of lump-sum fiscal transfers find sizable impacts on household spending in economies hit by negative demand shocks.
- Parker et al. (2013): estimate an MPC of between 0.5-0.9 within the first two quarters of receipt, increasing further in following months.
- Agarwal and Qian (2014): detect an MPC of 0.8 over the first 10 months in response to an exogenous cash transfer in Singapore, mainly driven by liquidity constrained households.
- Empirical evidence for Ricardian behaviour by households in response to fiscal policy changes is not strong (Romer, 2009).

### Survey evidence on direct transfers from the central bank
- Djuric and Neugart (2017), representative panel of 5,000 German households:
  - Spend about 38% of a direct transfer from the central bank in the same period.
  - Use 19% to pay down debt.
  - Save the rest.
- van Rooij and de Haan (2016), representative panel of 2,000 Dutch individuals:
  - Find comparable spending results.
  - Perception impacts on trust in the ECB: helicopter money would decrease trust among 18% of respondents; purchases of public and corporate debt or negative interest rates on saving accounts would decrease trust among 23%, 30%, and 50% respectively.
- ING (2016), survey across 12 euro area countries (12,000 participants):
  - 54% of respondents would perceive direct transfers favorably.
  - 14% would be skeptical.
- Survey data does not suggest significant Ricardian effects; spending behaviour is comparable to tax rebates or direct cash transfers from government.

### Ricardian considerations and theoretical complementarities
- Public sector liability arising from OT on the central bank balance sheet is more opaque, and is described as a permanent liability that in principle never has to be rolled over or repaid, akin to a perpetual bond remunerated at the prevailing short-term interest rate on excess reserves.
- Effectiveness of OT in t=0 is irrespective of whether the central bank intends to keep the liability forever; future servicing costs for the central bank would be state-dependent and only arise if the policy measure actually boosts nominal GDP at the ELB, thereby alleviating potential Ricardian effects.
- Ricardian effects are further attenuated as the NPV of future seigniorage itself is endogenous to whether and when OT is implemented.
- Gali (2020), using a New-Keynesian DSGE framework: even with fully Ricardian households, helicopter money (money-financed tax cut) would have a positive effect on aggregate demand and welfare due to nominal price rigidities; private net wealth increases in both nominal and real terms as prices take time to adjust, leading to higher aggregate demand.
- Benigno and Fornaro (2018): aggressive policy interventions can lift an economy out of a "stagnation trap" by shifting growth expectations.
- Buiter (2014): formalizes how helicopter money can achieve such outcomes in a theoretical model.
- Jorda et al. (2020): provide empirical evidence for non-neutrality of monetary policy even over the long run due to hysteresis effects.

### Positive spillovers and intra-currency-area rebalancing (summary of related Section 3.2)
- OT increases domestic demand, part of which flows into imports, producing positive spillovers to other economies within and outside a currency area.
- OT promotes intra-currency area rebalancing by being most impactful where macroeconomic policy support is needed most; regions hardest hit are likely to have higher MPCs, implying a larger share of transfer is spent there.
- In less-affected regions, more of the transfer will be saved; the portion spent would have greater impact on nominal price and wage growth relative to regions with larger negative output gaps, supporting competitiveness and rebalancing.
- QE is characterized as a blunt tool that depresses yields across a currency area and may disproportionately boost regions already doing relatively well; QE partly works through the exchange rate channel and reliance on external demand may widen global imbalances.
- Exchange rate effects of OT are ambiguous: a strengthening economy may attract capital inflows and appreciation, while monetary expansion could work the opposite way.
- In the euro area, OT would likely lead to a reduction of its current account surplus (notably in countries such as Germany); in currency areas with current account deficits (e.g., the U.S.), the deficit would tend to widen.

### Magnitude, calibration, and accounting (summary of related Section 3.3)
- OT should be employed judiciously, with careful monitoring of prices, output, and unemployment; a cautious and gradual approach is warranted given limited practical experience.
- Back-of-the-envelope illustrative calculation to achieve a boost to nominal GDP:
  - To boost nominal GDP by ca. 1% (e100 billion) in the euro area:
    - Requires a transfer of ca. e460 to every adult citizen (ca. 270 million) under the baseline assumption of an MPC of 0.8 (over four quarters) and a multiplier of 1.
    - If citizens under age 18 are included (total recipients around 340 millions), the individual transfer reduces to ca. 370e.
    - These numbers are close to estimates by Renault and Savatier (2021) and Martin et al. (2021): around 1% of GDP (or e385 per person, including children below age 15 with a weight of 50%) to generate a 1% boost to nominal GDP, half attributable to inflation.
    - Comparable to Muellbauer (2014) suggestion of e500 per adult in the euro area.
- Under this example:
  - Transfers would require a permanent increase in central bank money of around e125 billion.
  - e125 billion amounts to less than 1.5% of the Eurosystem’s October 15, 2021, balance sheet size of e8.337 trillion.
  - It would amount to about 5x the Eurosystem’s average yearly seigniorage of ca. e25 billion, meaning the reduction in central bank equity from the newly created liability could be replenished within five years with current annual seigniorage alone (all else equal).
- Calculation assumptions and caveats:
  - Assumes 270 million eligible recipients (adult population).
  - For simplicity, assumes no leakage of the stimulus to imports.
  - An MPC of 0.8 over four quarters is consistent with literature cited in Section 3.1.

### Distributional considerations and transfer options (summary of related Section 3.4)
- Monetary policy entails redistributive consequences; policy should achieve its mandate while minimizing redistributive impact, with active redistribution left to governments.
- Direct transfers from the central bank should be distributed as equitably as possible; several approaches discussed:

  - Transfers of equal size:
    - Equal absolute amount to every citizen.
    - Would reduce relative inequality and have higher welfare effect on lower-income households due to decreasing marginal utility of income.
    - Progressivity can be introduced by taxing transfers at individuals’ marginal tax rates under existing progressive national income tax schedules.
    - Unless exempted, OT would provide an additional source of tax revenue to governments.

  - Transfers according to capital key (relevant to euro area):
    - Distinguish transfers across member states according to capital key (population size and GDP in equal measure).
    - Economically stronger countries get relatively higher per capita OT share, reflecting higher cost of living and ownership structure of the central bank.
    - Transfers could be adjusted by national consumer price levels to reflect cost of living differences.
    - Such approaches may attenuate OT’s rebalancing effect, increase complexity, reduce public acceptance, and risk political division.

  - Means-tested transfers:
    - Distinguish transfers according to income level and phase out beyond thresholds, increasing efficacy (lower-income households have higher MPC).
    - Require cooperation from fiscal authorities and tax agencies for records, raising organizational and data privacy challenges.
    - Fiscal policymakers are better placed to undertake targeted redistribution via tax progressivity and social services; OT is not necessarily preferable to targeted fiscal support at the ELB but should be considered in lieu of asset purchases if fiscal support is not forthcoming.

### Practical implementation options (summary of related Section 3.5)
- Several implementation methods are outlined, with operational aspects:

  - Checks and CBDC:
    - Sending checks to eligible recipients is operationally similar to government cash transfers; names and addresses could be obtained from electoral registers.
    - Recipients deposit or cash checks at commercial banks; banks are credited the same amount in central bank money (reserves) upon delivering the check to the central bank.
    - A centralized digital register could track payments and prevent errors or fraud; national/regional central bank branches could cash checks directly.
    - Introduction of a central bank digital currency (CBDC) would facilitate delivery by obviating commercial banks as intermediaries and allow near-real-time provision or withdrawal of central bank money, but raises CBDC infrastructure and financial stability challenges beyond the paper’s scope.

  - Perpetual targeted long-term refinancing operation (PTLTRO):
    - Proposed by Lonergan (2016).
    - Central bank provides perpetual zero-coupon loans to banks on condition identical loans are passed on to households, akin to existing TLTRO setup.
    - Builds on existing central bank–bank–household infrastructure; would require a centralized electronic loan register for monitoring and preventing abuse.
    - Banks may need additional financial incentives to act as intermediaries and to take on newly created reserves initially not or negatively remunerated at the ELB (e.g., a commission or administration fee capped by the central bank at a few basis points, deducted from the loan up front).
    - After liftoff from the ELB, different scenarios for reserve remuneration (including higher non-remunerated minimum reserves) can be considered to preserve central bank policy solvency (see Section 4.5).

*Source: https://www.imf.org/-/media/files/publications/wp/2022/english/wpiea2022087-print-pdf.pdf*

### 3.6  Accounting for OT on the central bank balance

### 3.6  Accounting for OT on the central bank balance sheet

### Nature of the OT liability and central bank accounting implications
- OT creates a new liability in the form of reserves. This liability is perpetual by nature as no corresponding interest bearing asset is acquired that could be sold to reduce the reserves again.
- To balance its books after OT, the central bank can:
  - Book an instantaneous loss to equity, potentially leading to a negative equity position, or
  - Create a new matching but not interest bearing asset (e.g., related to a PTLTRO operation and covered by future seigniorage gains).
- Standard accounting rules and best practices regarding central bank transparency imply:
  - A perpetual zero-coupon bond would have to be valued at its mark-to-market value of zero.
  - Adherence to prudent accounting standards is key for central banks’ credibility.
  - Therefore, the central bank cannot circumvent recognizing a loss to its equity following OT.
- Despite this, booking a corresponding deferred asset may be preferable to reporting negative equity because it:
  - Creates a standalone position on the balance sheet,
  - Can be easily traced over time,
  - May facilitate communication with the public.

### Stylized balance-sheet effects (central bank, commercial banks, households)
- Stylized central bank balance sheet after OT (elements shown):
  - Assets: Claims on MFIs, FX Reserves, [Perpetual TLTRO* or Deferred Seigniorage Asset], Government Bonds, Other claims and assets, Revaluation accounts.
  - Liabilities: OT / PTLTRO (CiC and bank reserves), Currency in circulation (CiC), Bank reserves, Other liabilities, Loss on capital and reserves ("equity"), CLAC**.
  - Notes: TLTRO: targeted longer-term refinancing operation; CLAC: conventional loss absorption capacity.
- Commercial banks:
  - OT would cause a balance sheet extension as both deposits and reserves would increase by the same amount.
  - Initial effect on banks’ income position would be broadly neutral; this could change over time depending on interest rate dynamics and central banks’ policy choices regarding reserve remuneration.
  - Stylized commercial bank balance sheet after OT (elements shown):
    - Assets: Claims on MFIs, Claims on non-MFIs, Other claims and assets, OT Reserves* (remunerated at the policy rate on deposits or the rate on minimum reserves; policy choice by central bank to adjust reserve requirements upwards), Excess Reserves** (remunerated at the policy rate on deposits (unless exempted due to tiering)), Minimum Reserves*** (remunerated at the rate on minimum reserves).
    - Liabilities: OT Deposit of HH, Deposits, Cash, Other liabilities, Equity.
- Households:
  - OT implemented through either checks or PTLTRO would lead to an increase in net wealth for each individual citizen in equal magnitude, corresponding to the decrease in the central bank’s net wealth.
- Contrast with QE:
  - QE does not alter the net wealth of either sector mechanically but only through second round price effects, which impact individual households very differently.

### Options to address negative equity and intertemporal choices
- The central bank could:
  - Keep the negative equity position or the matching asset on its balance sheet indefinitely; for moderate amounts of OT this would not impinge on the central bank’s ability to control inflation.
  - Reduce overall liabilities and the outstanding stock of base money via the sale of other existing assets.
  - Eliminate the OT liability over time using future seigniorage, which involves choices over the intertemporal distribution of seigniorage.
- Legal and institutional arrangements (examples):
  - ECB: Article 33 of its Statute provides that in the event of a loss incurred by the ECB, the shortfall may be offset against the general reserve fund and, if necessary, against the monetary income of the relevant financial year; the ECB has clarified that losses that cannot be covered in a given year would be offset with future income from seigniorage.
  - Federal Reserve: Realized losses would be booked as a deferred asset and lead to a suspension of remittances to the Treasury until the loss has been recouped with future earnings.
  - Profit/loss sharing arrangements can create economic and political instability risks under QE due to concentrated holdings of national sovereign debt; OT would pool risks across a currency union.

### Assessing loss-absorption capacity — Eurosystem example and key figures
- Conventional loss absorption capacity (CLAC) of the Eurosystem (consolidated) as of end-2020:
  - CLAC ≈ e622 billion.
  - CLAC components: capital and reserves e109 billion; revaluation accounts e512 billion (text); (Figure 6 lists Revaluation Accounts, 2020 eop, EUR 513 bn).
- Non-inflationary loss absorption capacity (NILAC):
  - NILAC additionally includes the outstanding stock of currency in circulation and discounted future seigniorage gains.
  - Using conservative assumptions: annual seigniorage growth (1%) and discount rate (2% in line with target inflation), the net present value of future seigniorage:
    - In 2020: around e25 billion (annual seigniorage flow).
    - NPV of future seigniorage: around e4.5 trillion.
  - Currency in circulation (2020 eop) shown in Figure 6: EUR 1435 bn.
  - NPV Seigniorage calculation parameters in Figure 6: S/(i-g), S=25, i=0.02, g=0.01; EUR 2500 bn (figure component).
  - NILAC/CLAC ratio: around seven (very close to estimates by Buiter and Rahbari (2012)).
- Figure 6 components (as labelled):
  - Outright Transfer (calibrated), EUR 125 bn.
  - Capital and Reserves, 2020 eop, EUR 109 bn.
  - Revaluation Accounts, 2020 eop, EUR 513 bn.
  - Currency in Circulation, 2020 eop, EUR 1435 bn.
  - NPV Seigniorage (est.), S/(i-g), S=25, i=0.02, g=0.01, EUR 2500 bn.

### Negative central bank equity and policy solvency — theory and evidence
- Theoretical perspective:
  - A currency-issuing central bank can never become financially insolvent as its liabilities can always be serviced, but a strong balance sheet is important to preserve policy solvency (the ability to independently control inflation).
  - In systems with large excess reserves tied to deposit rates (e.g., Eurosystem corridor), the central bank may have to raise the deposit rate and incur remuneration costs.
  - To preserve policy solvency over the medium term, a central bank needs to cover operational costs and monetary policy operation costs (e.g., interest on reserves) through seigniorage profits. Otherwise it may have to print new central bank money, which could impede contractionary policy.
  - Negative central bank equity is not dangerous per se but becomes a concern if it follows an explosive negative path; theoretical intertemporal solvency constraints can illustrate when policy solvency can be retained despite large negative equity.
  - Policy solvency also depends on public confidence and expectations; strong balance sheets provide a margin of safety.
- Empirical perspective:
  - Negative central bank equity can pose risks if it approaches or exceeds the central bank’s NILAC; absent fiscal recapitalization this could lead to loss of confidence, excessive money growth, and a currency crisis.
  - Historical examples show both failures (Weimar Republic, Zimbabwe, Venezuela) and prolonged successful operations with negative equity (Chile, Israel, Czech Republic, Canada 1935-1975).
  - Post-WW II Germany (Bank deutscher Länder / Deutsche Bundesbank) operated effectively with negative equity for many years due to currency reform costs and FX valuation losses; the Bundesbank booked a claim on the government ("Sonderposten Ausgleichsforderungen") remunerated at 1% p.a., remaining on the balance sheet with amortization slated to begin in 2024.
  - The Bundesbank also faced costs from German reunification; the government assumed costs via "Ausgleichsfonds Währungsumstellung" ≈ ca. e30 billion in 1994.
  - Empirical literature:
    - Bindseil et al. (2004): negative central bank equity at varying levels does not impinge on central banks’ abilities to control interest rates, but maintaining a strong balance sheet is advisable for political economy reasons.
    - Adler et al. (2016): suggests a negative link between a central bank’s financial strength and its performance in controlling inflation.
    - Hampl and Havranek (2018) meta-analysis: the nexus is not particularly strong.
    - Benecka et al. (2012): detect strong non-linearities, results driven by financially weak outliers.

*Source: 3.6 Accounting for OT on the central bank balance sheet (excerpt).*

### 4.4  OT vs. QE effects on balance sheet strength, seignior-

### 4.4 OT vs. QE effects on balance sheet strength, seigniorage, and ease of exit

### Balance sheet trade-offs and seigniorage implications
- OT creates an unmatched liability for the central bank and an instantaneous reduction in central bank equity; however, the magnitudes suggested in Section 3.3 would constitute a small fraction of the NILAC and "the expected losses on equity resulting from the newly created and unmatched reserves would not present material risks to policy solvency."
- Long-term general equilibrium effects of OT could be positive by contributing to faster recovery, higher growth in real money demand, and ultimately greater seigniorage.
- Seigniorage is endogenous to monetary policy operations and difficult to forecast; in "normal" pre-crisis times with full allotment and little excess reserves, seigniorage tends to increase with nominal GDP growth as money demand grows and the interest rate differential between a central bank’s assets and its monetary base is strictly positive for an upwards sloping yield curve.
- It is not clear a priori whether OT’s direct up-front reduction in equity would outweigh the costs and risks of large-scale asset purchases (QE) in terms of the expected net present value (NPV) of future seigniorage for a given monetary stimulus.

### Stylized comparison: illustrative calibration and key assumptions (Figure 9)
- Calibration to deliver a 1% boost to nominal GDP:
  - OT: e125 billion of direct transfers.
  - QE: e1,500 billion of asset purchases (around 15% of GDP).
- Starting deposit rate: -0.5%.
- QE portfolio assumptions:
  - Weighted average maturity: 8 year.
  - Average return: 0%.
  - Zero-coupon bonds (duration = weighted average maturity).
  - Parallel shift of the yield curve following an increase in the deposit rate by the same amount.
  - No reserve tiering or new net asset purchases assumed.
- Stylized results (year 1 following an increase in the deposit rate):
  - OT:
    - Upfront non-recurring loss: e125 billion.
    - Recurring reserve remuneration costs: range from -e0.6 billion p.a. for a negative deposit rate of -.5% to e3.1 billion p.a. for a deposit rate of 2.5%.
  - QE:
    - No upfront cost initially, but:
      - Recurring reserve remuneration costs: range from -e7.5 billion p.a. to e37.5 billion p.a.
      - One-off valuation (unrealized) losses: range from e0 billion to e316 billion.
    - Valuation losses may be avoided if assets are held to maturity but would still be booked against revaluation accounts or equity.
- Interpretation:
  - QE expands the central bank balance sheet by more than an order of magnitude relative to OT for the same nominal GDP impulse, increasing interest rate risk and making exit more difficult.
  - From a risk-return perspective, OT may be preferable: more costly up-front but less costly and risky over time, and easier to calibrate and more transparent regarding balance sheet consequences.
  - The tradeoff depends on the shape of the yield curve and the asset purchase amount needed; a dynamic comparison across business cycle position, yield curve, and other circumstances is suggested for future research.

### Preserving central bank policy solvency: reserve requirements and remuneration
- Policy options to preserve solvency when tightening is warranted:
  - Adjust forward guidance and reduce the balance sheet via open-market operations to mop up excess liquidity (which would induce steepening of the yield curve).
  - Raise deposit and lending rates to shift up short-end rates (but this creates large costs given expanded central bank balance sheets).
- Tiering reserve remuneration in an upswing:
  - Allows newly created reserves to be remunerated at zero or below the desired policy rate.
  - Would require adjusting minimum reserve requirements (MRR) upwards to anchor interbank rates close to the main deposit rate on excess reserves.
  - The central bank may choose to remunerate all minimum reserves or just the fraction attributable to OT at below policy rate.
- Historical and cross-country practice:
  - Advanced economies moved away from active use of reserve requirements since the early 1980s; emerging market economies (e.g., China) still employ them actively.
  - In countries with low reserve requirements, money creation is not constrained because reserves are provided ex-post against adequate collateral.
- Costs and distributional considerations:
  - Actively using reserve requirements and their (non-)remuneration imposes a tax on the banking sector (financial repression) that could be passed on to bank customers; this can amplify contractionary effects.
  - Given existing implicit transfers from the ECB’s tiering and TLTRO III to banks (subsidizing what would otherwise be seigniorage accruing to the general public), tiering reserves in the opposite direction during recovery may be justifiable.
- Fiscal interactions and consolidated budget constraint:
  - A solvent fiscal authority could recapitalize the central bank, but this may not be realistic or feasible in some circumstances.
  - OT and tiering expand options to smooth the intertemporal consolidated budget constraint of the state (central bank and fiscal entities).
- Banking sector and general equilibrium effects:
  - In a cyclical upswing enabled by QE and/or OT, banks would be better positioned to absorb costs from reserve tiering due to higher credit volumes, lower non-performing loan ratios, increased net interest margins from a steeper yield curve, and higher profits from maturity transformation.
  - Net effect on bank profitability and financial stability may be positive depending on tiering calibration; a comprehensive general equilibrium cost-benefit analysis is beyond the scope of the paper and recommended for future research.

### Quantitative examples and comparative costs to the banking sector
- OT vs QE medium-run unwinding advantage:
  - OT creates much fewer new reserves than QE for the same inflation impact; thus costs to the banking sector from reserve tiering would be far smaller.
- Examples cited:
  - If e125 billion in OT is fully tiered, annual cost to the banking sector would be e2.5 billion for an interest rate differential between required and excess reserves of 200 bps.
  - Eurosystem banks’ interest rate expenditures on excess reserves were lowered by close to e5 billion between October 2019 and December 2020 due to the current tiering system (Deutsche Bundesbank, 2021).
  - TLTRO III example: direct transfers to banks could amount to an annual subsidy of around e11 billion for an outstanding volume of e2.2 trillion and an interest rate differential of 50 bps if all banks satisfy the lending target (Da Silva et al., 2021).

### Conclusions and policy implications
- OT should be strictly limited to exceptional circumstances when conventional levers are exhausted and fiscal policy is unable to provide needed support.
- For moderate levels of negative central bank equity well below NILAC, central bank policy solvency is unlikely to be at risk; risks can be addressed via judicious tiering of reserves.
- Tiering can help rebuild central bank equity faster, avoid potential explosive dynamics from rising negative equity, and provide greater policy space—while the central bank must weigh costs imposed on the banking sector and/or bank customers.
- Policy solvency for moderate negative equity is ultimately a policy choice of the central bank.

*Source: 4.4 OT vs. QE effects on balance sheet strength, seigniorage, and ease of exit (from the provided PDF content).*

### 4.6  A more active role for fiscal and structural policies

### 4.6  A more active role for fiscal and structural policies

### Rationale for using fiscal and structural policies to support price stability
- Interest rate hikes, selling assets, or raising reserve requirements are "rather blunt tools" with individual drawbacks and may not be the best tool when price pressures are primarily driven by non-monetary factors.
- Non-monetary drivers listed include:
  - supply chain disruptions,
  - real private and public underinvestment,
  - corporate market power,
  - pandemic-related sectoral reallocations from services to goods,
  - one-off fiscal support measures,
  - trade barriers, and
  - regulations.
- Employing fiscal and structural policies can reduce inflationary pressures and increase potential output in a manner that is "more growth-friendly and equitable" and less disruptive to the economy.

### Examples of structural and targeted fiscal measures
- Semiconductor shortage example:
  - The 2021 semiconductor shortage had large knock-on effects on the price of cars and consumer goods.
  - It was partially attributable to "high and rising demand from cryptocurrency mining," which drew scarce global real resources away from productive activities and led several countries to ban cryptocurrency mining.
- Housing example:
  - Imputed rents from owner-occupied housing have risen markedly in line with higher housing prices.
  - Policy responses that could dampen price pressures and improve affordability include expanding housing supply and/or tightening macroprudential policy tools while exempting first-time home buyers.
- Medium-term targeted public policies:
  - Promote an efficient allocation of resources, competition, innovation, and strategic investments to address supply-side bottlenecks or market failures.
  - Such policies can both "boost growth and dampen price pressures."

### Fiscal tools to curb excessive inflationary pressures
- In economies with "too much money is chasing too few goods," fiscal policy can reduce purchasing power and remove money from circulation by:
  - levying higher taxes, and
  - paying down debt.
- Distributional considerations:
  - Progressive taxation reduces the disinflationary impact because high-income earners have a lower marginal propensity to consume (MPC), but progressive taxation may be desirable to "ensure fair burden-sharing."
- Spending-side measures:
  - Containing current expenditures on items with a low multiplier can attenuate inflationary pressures "without strong adverse effects on growth."

### Fiscal theory of the price level (FTPL) and policy coordination
- In line with the FTPL:
  - Expansionary fiscal policy (or OT) can help achieve price stability at the ELB.
  - Conversely, contractionary fiscal policy should help achieve price stability in an overheating economy.
- Policy mix considerations:
  - The "optimal mix of fiscal, structural, and monetary policies" should account for tradeoffs and be informed by country-specific circumstances.

*Italic: Source: wpiea2022087-print-pdf - 4.6  A more active role for fiscal and structural policies*

### 6.1  Central bank independence

### 6.1  Central bank independence

### Central bank independence concerns
- Direct transfers from the central bank have been criticized because they "could raise unwarranted expectations" that such transfers "can be made at will in the future, irrespective of economic conditions", potentially endangering central bank independence and its ability to fulfill its mandate.
- The same argument applies to any central bank policy (e.g., lowering policy rates or asset purchases) that affects a government's refinancing costs.
- OT (outright transfers) would help attenuate fiscal dominance risks vis-á-vis other policy instruments at the ELB (see Section 5.3).

### Institutional safeguards and balance sheet considerations
- Strong institutional safeguards for separation between central bank and fiscal authorities exist, including independent decision-making mechanisms that guard against political abuse, independent of the type of monetary policy instrument.
- A strong central bank balance sheet, whose equity position does not require fiscal support to avoid breaching its NILAC, supports central bank independence.
- The central bank would not come close to that limit for any reasonable calibration of OT (see Section 4.2).
- It is not evident that the central bank’s balance sheet would be weaker under OT than under a large asset purchase driven expansion of its balance sheet in net present value terms (see Section 4.4).
- Adherence to prudent and transparent accounting standards (see Section 3.6) is essential to preserve and strengthen public trust in the central bank’s actions.

### Rules, conditionality, and communication
- OT should be clearly communicated as an extraordinary policy measure geared toward extraordinary circumstances at the ELB.
- The volume—and potential future rounds—of OT should be strictly conditional on inflation dynamics, for example in the form of pre-determined quantitative thresholds beyond which OT would be inadmissible.
- Example rules-based guidance: the "Sahm" rule (Sahm, 2019), which proposes automatic cash transfers to households when the three-month moving average of the unemployment rate increases by 0.5 percentage points or more over its trough during the preceding twelve months.
- As the economy lifts off from the ELB, no more OT would be needed and the central bank could revert to traditional interest rate tools.

### Suitability across jurisdictions
- OT would only be suitable for central banks with strong institutional frameworks that provide safeguards against undue political interference and risks of abuse.
- The ECB is cited as well placed to implement OT given its independence, strong operational framework, and analytical capacities.
- Economies without those characteristics typically do not face the problem of idle domestic capacities at the ELB and associated deflationary pressures that OT targets; in less-developed economies, OT or similar unconventional measures may have adverse effects on confidence, capital flows, and the exchange rate due to weaker institutional safeguards, lower reserves, and higher susceptibility to sudden stops.
- In reserve-currency issuing economies, OT would strengthen confidence—and possibly the exchange rate—by supporting a strong and swift economic recovery without jeopardizing price stability or central bank policy solvency.

---

### 6.2  Institutional Legitimacy

### Core legitimacy critique
- A major critique: direct transfers lie outside eligible monetary policy instruments within the division of powers; direct transfers are viewed as fiscal policy that should be undertaken by the government through its fiscal authority.
- OT could be seen as a quasi-fiscal activity beyond the central bank’s mandate, involving direct losses on central bank capital, making it politically controversial and potentially exposing the central bank to legal and political challenges.

### Factors that attenuate legitimacy concerns
- (i) Redistribution is generally the prerogative of fiscal policy; from this perspective, OT would be preferable to QE because its redistributive consequences would be largely neutral and much less opaque. OT would also avoid asset price distortion and misallocation risks.
- (ii) Every monetary policy measure has fiscal consequences; interest rate policy and asset purchases can also redistribute wealth and income. OT would result in a direct loss to central bank equity, while asset purchases expose the central bank to losses that are more opaque and uncertain.
- (iii) Some central banks have used measures that directly benefit specific groups (e.g., equity purchases by the Bank of Japan or the ECB's tiered reserve remuneration), which can be less straightforward from an institutional legitimacy perspective because they favor asset owners or bank shareholders more strongly than the rest of society.
- (iv) Central banks in major advanced economies act with accountability to the public and within democratic processes, aiming to achieve politically given mandates as stipulated by legal provisions. Reserve-currency issuing central banks adhere to strict reporting requirements and are subject to the rule of law.

---

### 6.3  Legal considerations

### Legal foundation and administrative law principle
- Central banks, as public entities governed by public law, can only do what is authorized by law (the "legality"/"attributed powers" principle).
- Central bank laws establish objectives, functions, and specific powers; to legally conduct OT, the law should provide explicit or at least implicit powers to conduct that operation.
- Central bank laws currently do not typically provide a clear and unambiguous legal foundation for OT.

### Euro area specific considerations (ESC B / ECB)
- The Statute on the ESCB and the ECB explicitly allows for open market and credit operations (Article 18) and allows for the use of "other instruments of monetary control" (Article 20) which can be decided under an exceptional decision-making procedure by the Governing Council.
- Given the vagueness of Article 20, it is not unambiguously clear whether it would cover OT—a direct and permanent increase of both base and broad money.
- Former ECB president Mario Draghi called OT an "interesting concept" that "clearly involves complexities, both accounting-wise and legal-wise". Former ECB chief economist Peter Praet stated the ECB "can issue currency and (...) distribute it to people" while calling it "an extreme sort of instrument".
- OT would not violate the monetary financing prohibition in the Statute (Article 21), contrary to some proposals elsewhere.

### Article 2 and general economic objectives
- Article 2 tasks the ESCB with maintaining price stability and, "without prejudice to the objective of price stability", to support general economic objectives of the European Union, including full employment, social progress, economic, social and territorial cohesion, solidarity among member states, and a sustainable balance of payments.
- Article 2 requires the ESCB to pursue its goals "favouring an efficient allocation of resources", which from an economic perspective would favor OT over QE because OT would not have a distortionary impact on relative prices.

### Legal risks, courts, and political economy
- A court case against OT would be all but guaranteed, and legal uncertainty regarding the interpretation of Article 20 would likely require a ruling by the ECJ.
- Monetary financing prohibition and related quantity and time limits to asset purchases that have loomed large in prior court cases would not apply to OT.
- OT could allay concerns expressed by the German Constitutional Court regarding proportionality and distributional impact because OT would keep redistributive effects and financial stability risks to a minimum.
- Direct transfers are already a de facto element of the monetary policy toolkit in the euro area through tiering of reserves and TLTRO III, which lower Eurosystem remittances to fiscal authorities and its ability to increase provisions for general risks; these implicit transfers are described as more opaque and less equitable than OT.
- The Statute is explicit on reserve requirements (Article 19): "[s]ubject to Article 2, the ECB may require credit institutions ... to hold minimum reserve on accounts with the ECB and national central banks in pursuance of monetary policy objectives. Regulations concerning the calculation and determination of the required minimum reserves may be established by the Governing Council."

### Legislative endorsement recommended
- It would be desirable to have an endorsement for OT by the legislature, including a corresponding central bank law amendment to remove legal uncertainties.
- Such an amendment should spell out the conditions under which OT can be employed to provide safeguards against abuse, akin to existing central bank laws that allow central banks to provide credit to the government under certain qualitative and quantitative conditions.

---

### Conclusion (Section 7) — key findings and policy recommendations
- In an economy at the effective lower bound, well-calibrated outright transfers from the central bank to households would constitute an equitable and effective monetary policy tool to achieve price stability objectives and stimulate aggregate demand.
- OT would be superior to asset purchases and negative interest rates in both achieving price stability and stimulating aggregate demand.
- OT would automatically provide stronger policy support in regions of a currency area hit harder by a shock due to different marginal propensities to consume, contributing to internal and external rebalancing.
- OT could be operationalized through physical checks, CBDC, or perpetual zero-coupon targeted long-term lending operations, building on existing financial market infrastructure and payment systems.
- Costs: direct transfers create a liability for the central bank not matched by interest-bearing assets, creating risk to policy solvency if taken to unsustainable levels.
- Prolonged large-scale asset purchases carry similar equity risks, exacerbate wealth inequalities, rely on potentially excessive credit creation, distort relative prices, and raise fiscal dominance concerns.
- For moderate and carefully calibrated amounts of OT, strictly conditional on inflation dynamics, the risk of policy solvency appears small in reserve-currency issuing economies with strong institutions, robust central bank balance sheets, and safeguards to prevent unwarranted or excessive use.
- OT should be reserved for stagnation traps characterized by sizable slack and depressed interest rates; even then, targeted fiscal measures that are means-tested and raise productive capacities in a sustainable, green, and inclusive way would be more desirable if politically and economically feasible.
- OT differs from debt-financed fiscal stimulus: the central bank liability would be state-contingent, not subject to rollover risk, and entail implicit risk-sharing across fiscal entities of a currency area—potentially welfare-improving for currency unions lacking central fiscal capacity.
- OT reduces rather than increases fiscal dominance risks relative to asset purchases on the secondary market.
- Legal prohibition: a money-financed fiscal stimulus is legally prohibited in the euro area and would require fiscal policymakers' cooperation even if permitted.
- If post-GFC mistakes of premature fiscal consolidation are repeated, direct central bank transfers to households would be a powerful addition to the monetary policy toolkit to achieve policy objectives effectively and equitably.

*Source: wpiea2022087-print-pdf - 6.1  Central bank independence*

### References

### References

### Major thematic areas represented
- Central bank capital, financial strength, and implications for monetary policy and independence (examples include works by Adler, Castro, and Tovar (2016); Stella (1997, 2002, 2008); Bindseil, Manzanares, and Weller (2004); Del Negro and Sims (2015); Hall and Reis (2015); Kyriakopoulou and Ortlieb (2021)).
- Monetary finance, helicopter money, and money-financed fiscal stimulus (examples include Buiter (2014, 2020a, 2020b); Borio, Disyatat, and Zabai (2016); Gali (2020); Turner (2015a, 2015b, 2016a, 2016b); Borio and Disyatat (2009)).
- Unconventional monetary policies, balance sheet policies, and large-scale asset purchases (examples include Bonis, Fiesthumel, and Noonan (2018); Borio and Disyatat (2009); Dell’Ariccia, Rabanal, and Sandri (2018); Altavilla, Giannone, and Lenza (2014); Carpenter et al. (2013)).
- Distributional effects, inequality, and macroeconomic outcomes (examples include Berg and Ostry (2017); Bonifacio et al. (2021); Ampudia et al. (2018); Mian, Straub, and Sufi (2020, 2021); Saez and Zucman (2020)).
- Fiscal–monetary interaction, fiscal rules, and Euro Area institutional issues (examples include Blanchard (2021); Blanchard, Leandro, and Zettelmeyer (2021); Berger, Dell’Ariccia, and Obstfeld (2019); Barkbu et al. (2018); Gaspar (2020); Darvas, Martin, and Ragot (2018)).
- Reserve requirements, tiering, and operational tools (examples include Bindseil (1997, 2020); Deutsche Bundesbank (2021); Feinman (1993); Schobert and Yu (2014)).
- Historical and empirical studies on central bank losses, profits, and yield management (examples include Dziobek and Dalton (2005); Barrdear and Kumhof (2016); Bonis, Fiesthumel, and Noonan (2018); Garbade (2020)).

### Representative citations (selection, preserving original presentation)
- Adler, G., P. Castro, and C. E. Tovar(2016): “Does Central Bank Capital Matter for Monetary Policy?”Open Economies Review, 27, 183–205.
- Buiter, W.(2014): “The simple analytics of helicopter money: Why it works - always,”Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), 8, 1–51.
- Borio, C. and P. Disyatat(2009): “Unconventional monetary policies: an appraisal,” BIS Working Papers 292, Bank for International Settlements.
- Bonifacio, V., L. Brandao-Marques, N. Budina, B. Csonto, C. Fratto, P. Engler, D. Furceri, D. Igan, R. Mano, M. Narita, M. Omoev, G. K. Pasricha, and H. Poirson (2021): “Distributional Effects of Monetary Policy,” IMF Working Papers 2021/201, International Monetary Fund.
- Del Negro, M. and C. Sims(2015): “When does a central bank’s balance sheet require fiscal support?”Journal of Monetary Economics, 73, 1–19.
- Gali, J.(2020): “The Effects of a Money-Financed Fiscal Stimulus,”Journal of Monetary Economics, 115(C), 1–19.
- Mian, A., L. Straub, and A. Sufi(2021): “Indebted Demand,”The Quarterly Journal of Economics, 1-65, doi:10.1093/qje/qjab007.
- Reinhart, C. and B. Sbrancia(2015): “The liquidation of government debt,”Economic Policy, 30, 291–333.
- Stella, P.(1997): “Do Central Banks Need Capital?” IMF Working Papers 1997/083, International Monetary Fund.
- Turner, A.(2015a):Between Debt and the Devil: Money, Credit, and Fixing Global Finance, Princeton University Press, Princeton CT.

### Observations on the bibliography composition
- The reference list spans academic journals, IMF working papers and staff notes, central bank working papers and reports, CEPR and NBER working papers, policy essays, and speeches/interviews.
- Several entries explicitly address European Central Bank (ECB) and Euro Area institutional and legal issues, reflecting attention to region-specific policy frameworks.
- Multiple entries focus on empirical evidence and micro-level studies (household consumption, debt responses, distributional impacts) alongside theoretical and macro-structural treatments (secular stagnation, potential output, yield curve control).

*Advancing the Monetary Policy Toolkit through Outright Transfers — References (Working Paper No. WP/2022/87)*

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_Source: https://www.imf.org/-/media/files/publications/wp/2022/english/wpiea2022087-print-pdf.pdf_