Helicopter drop helicopter money

What Is Helicopter Drop (Helicopter Money)?

Helicopter drop, more commonly known as helicopter money, is an unconventional form of monetary policy where a central bank directly distributes money to the public or finances government spending, typically with newly created money. The aim of helicopter money is to directly stimulate aggregate demand and combat periods of severe economic stagnation, particularly when traditional tools like cutting interest rates are no longer effective, such as in a liquidity trap. This approach bypasses the conventional banking system to inject cash directly into the economy, aiming to boost consumption and investment.

History and Origin

The concept of helicopter money was first introduced by Nobel Prize-winning economist Milton Friedman in his 1969 essay, "The Optimum Quantity of Money." Friedman used a thought experiment involving a helicopter flying over a community and dropping money to illustrate the effects of a sudden increase in the money supply on inflation and economic behavior. He intended it as a theoretical device to explain the link between money supply and price levels, not as a direct policy recommendation at the time.¹⁶

The term gained wider recognition in the early 2000s when former Federal Reserve Chairman Ben Bernanke referenced Friedman's concept in a 2002 speech, suggesting it could be a potent tool to fight deflation, particularly in the context of Japan's economic challenges.¹⁴, ¹⁵ While not implemented in its purest form, the idea of direct money transfers as a last-resort stimulus has since been a recurring topic of discussion among economists and policymakers during significant economic downturns.

Key Takeaways

• Helicopter money is an unconventional monetary policy involving direct money transfers from a central bank to the public or direct financing of fiscal policy.
• Its primary goal is to stimulate economic growth and combat deflation when traditional tools are ineffective.
• The concept was first theorized by Milton Friedman in 1969 and popularized by Ben Bernanke.
• It differs from traditional monetary policy in its direct transmission mechanism, bypassing the banking system.
• The effectiveness and potential side effects, such as inflationary pressure or risks to central bank independence, are subjects of ongoing debate.

Interpreting the Helicopter Drop

When considering helicopter money, its interpretation hinges on its direct and immediate impact on consumer spending and investment. Unlike policies that work through financial markets, such as lowering interest rates or purchasing government bonds, helicopter money directly increases the purchasing power of individuals or the financing capacity of the government. The expectation is that recipients will spend the newly acquired funds, thereby increasing aggregate demand throughout the economy. The success of a helicopter drop is often measured by its ability to lift an economy out of a recession or stave off severe deflationary spirals by directly injecting liquidity into the real economy.

Hypothetical Example

Imagine a country, "Economia," facing a deep recession with persistent deflation and near-zero interest rates, rendering conventional monetary policy ineffective. The central bank of Economia decides to implement a helicopter money program.

1. Decision: The central bank announces it will create 100 billion "Economia Dollars" (E$) and distribute it directly to all registered adult citizens.
2. Distribution: Through digital transfers, each adult citizen receives E$1,000 directly into their bank account.
3. Impact: With this unexpected influx of cash, citizens, confident that this is a one-time event, begin spending. Maria, a small business owner, uses her E$1,000 to buy new inventory for her shop and a new appliance for her home. John, a recent graduate, uses his E$1,000 for a down payment on a used car, which he had been postponing.
4. Multiplier Effect: The spending by Maria and John generates income for others, who then also spend, creating a multiplier effect that ripples through the economy. This increased spending stimulates demand for goods and services, prompting businesses to increase production and potentially hire more workers. Over time, this direct injection of money helps to reverse the deflationary trend and encourages economic growth.

Practical Applications

While a literal "helicopter drop" of cash has not occurred, the concept influences discussions around various forms of direct stimulus. During the COVID-19 pandemic, many governments worldwide implemented direct cash transfers to households and businesses as part of their economic relief efforts. For instance, some stimulus measures taken in response to the COVID-19 crisis have been likened to helicopter money by economists, as they involved substantial injections of cash into the U.S. economy. Similarly, the International Monetary Fund (IMF) has discussed the potential for direct payments to households to prevent severe economic slumps, particularly for low-income households.¹³

These real-world applications often involve a coordination between the central bank and the fiscal policy authority, where the central bank might facilitate the financing of government transfers. This differs from standard government spending financed by debt or taxes, as it involves the explicit creation of new money by the central bank to directly fund transfers without creating a corresponding asset on the central bank's balance sheet.

Limitations and Criticisms

Despite its potential effectiveness in stimulating demand, helicopter money faces significant limitations and criticisms. One major concern is the risk of blurring the lines between monetary policy and fiscal policy, potentially undermining central bank independence and accountability. Critics argue that such a policy could lead to political interference in monetary decision-making.¹¹, ¹²

Another primary criticism revolves around the potential for uncontrolled inflation or even hyperinflation if the money supply increases too rapidly and is perceived as permanent.⁹, ¹⁰ There's also the question of whether helicopter money would actually be spent, or if households might save the additional funds, thereby diminishing the desired stimulative effect. Furthermore, some economists argue that it could weaken the central bank's balance sheet in the long run, especially if the central bank has to pay interest on the reserves created by the helicopter money without receiving interest on its corresponding "assets."⁷, ⁸ This highlights the "no free lunch" argument often made against such unconventional policies.⁶

Helicopter Drop (Helicopter Money) vs. Quantitative Easing

While both helicopter money and Quantitative Easing (QE) are unconventional monetary policy tools used to expand the money supply and stimulate the economy, their mechanisms and implications differ significantly.

Helicopter Money involves the direct transfer of newly created money to the public or direct financing of government spending, bypassing the banking system. The central bank essentially "gifts" money without acquiring an equivalent asset on its balance sheet, thus representing a permanent increase in the monetary base. The intention is to directly boost aggregate demand and consumption.

Quantitative Easing, conversely, involves a central bank purchasing financial assets, primarily government bonds and other securities, from commercial banks and other financial institutions. This increases the monetary base by crediting the banks' reserve accounts, but it's fundamentally an asset swap. Banks receive reserves in exchange for their securities, aiming to lower long-term interest rates and encourage lending and investment. Unlike helicopter money, QE is generally considered reversible, as the central bank can eventually sell these assets back into the market.⁴, ⁵ The key distinction lies in the directness of the money injection and the impact on the central bank's balance sheet and the permanence of the money creation.

FAQs

Is helicopter money the same as printing money?

Yes, in essence, helicopter money involves the creation of new money by the central bank that is then directly distributed or used to finance fiscal policy. It expands the money supply.³

Has helicopter money ever been implemented?

While not in the literal sense of money falling from the sky, some economic stimulus measures, particularly direct cash transfers during the COVID-19 pandemic, have been compared to the concept of helicopter money due to their direct nature.

What is the main goal of helicopter money?

The primary goal of helicopter money is to directly boost aggregate demand and stimulate economic growth, especially in situations where an economy is facing deflation or a liquidity trap and conventional monetary policies are ineffective.

Could helicopter money cause hyperinflation?

Critics are concerned that if implemented excessively or repeatedly, helicopter money could lead to high inflation or even hyperinflation, as it directly increases the money supply without a corresponding increase in goods and services. However, proponents argue that under specific conditions, its inflationary impact can be controlled.¹, ²