Morgan Stanley says the Bank of England is free to get increasingly unorthodox with its monetary policy...
Global financial services firm Morgan Stanley believes that the Bank of England could look beyond traditional monetary policy as it guides the British economy through Brexit.
In a note entitled Out into the unknown, Morgan Stanley economists Melanie Baker and Jacob Nell suggest "helicopter money" could be deployed – where central banks create cash and give it directly to a country's citizens, no strings attached.
Though it has been a hypothetical up until now, the economists argue that it may become a necessity in the UK.
"We see a possibility of a more radical fiscal and monetary policy option to help a UK economy suffering from a referendum recession.
"The objective would be to provide policy support through a targeted intervention with a high multiplier – use-it-or-lose-it consumption vouchers for the liquidity-constrained.
"We see this as a form of government money, which would ultimately be backed by long-term government debt held by the central bank.
"It would be cheap, since the interest and principal would be paid by the central bank back to the government,and it could be effective, if it drove additional consumption rather than savings.
"However, such radical policy experiments would open up risks and could impact the credibility of UK institutions and the demand for UK assets.
"In this situation, the BoE's scope for monetary policy action could become more constrained by the potential reaction of the FX and gilt markets."