Quantitative easing (QE) programs by central banks under the right conditions will always have a positive outcome for household demand, according to Willem Buiter, chief economist at Citi, who predicts that Japan and the euro zone will soon launch "massive" stimulus packages.
In a 52-page thesis released on Thursday, the economist analyses Milton Friedman's principles on "helicopter money", giving the example of permanent QE – the irreversible open market purchase of sovereign debt by central banks. He concludes that three conditions need to be met for QE to "always" boost aggregate demand.
"Deflation, 'lowflation' and secular stagnation are therefore unnecessary. They are policy choices," he said in the paper. "State-issued fiat money is indeed net wealth to the private sector."
Boost to demand?
The three conditions that need to be met, according to Buiter, are that there needs to be benefits to holding that money other than its rate of return. It also needs to be irredeemable and viewed as an asset, and nominal interest rates need to be positive.