On 26 March 2020, the Swiss National Bank (SNB) announced it would lend unlimited money to banks to shore up the economy.
Its COVID-19 refinancing facility (CRF), is aimed at strengthening the supply of credit to the Swiss economy by providing the banking system with additional liquidity. The SNB said there would be no upper limit on the amounts available, and drawdowns could be made by banks at any time, enabling banks to expand their lending rapidly and on a large scale.
Helicopter money is an idea that has been circulating for sometime. Instead of central banks making loans or buying assets to expand the money supply, they do it by handing out money with no strings attached, something known as helicopter money.
Advocates of this approach argue helicopter money is a better way to get demand going. It puts the money where it will be spent, which is a more effective way to boost the economy.
However, there are risks with it. The first is political. Political parties might be tempted to use helicopter money to buy votes, undermining the independence of the central bank.
The second risk in inflation. If politicians, in a scramble to buy votes, pumped too much fast moving money into the economy, it could spark inflation, hurt savers and add to the growing hole in Switzerland’s pension system.
The inflationary effect of central bank policy typically takes around a year and half to appear and can be difficult to reverse. If the SNB expands the money supply by buying assets or making loans, it can reverse these actions later by selling assets back into the market or by reducing loans, effectively mopping up money it released.
However, helicopter money cannot be reversed. The SNB and Switzerland’s main political parties expressed similar concerns in the lead up to a vote to change Switzerland’s monetary system in 2018.