Helicopters

What Is Helicopter Money?

Helicopter money is an unconventional monetary policy concept where a central bank directly distributes newly created money to the public to stimulate an economy during a severe downturn, especially when traditional tools like lowering interest rates are ineffective. The term envisions money literally being dropped from a helicopter, symbolizing a direct and broad transfer of funds to individuals or households, bypassing the banking system. It falls under the broader category of monetary policy and is typically considered a last-resort measure to combat deflation and boost aggregate demand.

History and Origin

The concept of helicopter money was famously introduced by Nobel laureate economist Milton Friedman in his 1969 essay, "The Optimal Quantity of Money." In his thought experiment, Friedman described a hypothetical scenario where a helicopter flies over a community and drops a one-time, unexpected sum of money, which is then collected by the residents. This parable served to illustrate the effects of an increase in the money supply and how it could influence inflation and economic activity if the public perceived the increase as permanent. Friedman's aim was not to propose it as an actual policy, but rather to show how a central bank could always generate inflation if it chose to do so¹⁴.

The idea gained renewed attention in the early 2000s, particularly in discussions surrounding Japan's prolonged period of deflation, and was further popularized by former Federal Reserve Chairman Ben Bernanke in 2002. Bernanke suggested that a money-financed tax cut was "essentially equivalent to Milton Friedman's famous 'helicopter drop' of money" as a potential tool to prevent deflation.¹², ¹³

Key Takeaways

• Helicopter money involves a direct distribution of newly created money by a central bank to the public.
• It is considered an extreme economic stimulus measure, typically reserved for periods of deep recession or persistent deflation when conventional monetary policy tools are exhausted¹¹.
• The primary goal is to directly increase consumer spending and ignite inflation by boosting aggregate demand.
• Unlike quantitative easing, helicopter money is often perceived as a permanent increase in the money supply without a corresponding increase in central bank assets.
• Concerns exist regarding its potential for hyperinflation, political interference with central bank independence, and challenges in reversing the policy¹⁰.

Formula and Calculation

Helicopter money does not have a specific mathematical formula in the same way that a financial ratio or investment metric would. It is a conceptual framework for a direct transfer of purchasing power. However, its intended impact on the broader economy can be understood through the quantity theory of money, which is often expressed as:

$MV = PQ$

Where:

• (M) = Money Supply (the amount of money in circulation)
• (V) = Velocity of Money (the rate at which money is exchanged in an economy)
• (P) = Price Level (average prices of goods and services)
• (Q) = Quantity of Goods and Services (real output or GDP)

Helicopter money directly aims to increase (M) (money supply). The hope is that this increase in (M), combined with an increase in (V) due to direct spending, will lead to an increase in (P) (price level/inflation) and/or (Q) (real output). The challenge lies in ensuring that the newly distributed money translates into higher velocity rather than simply being saved, and that the long-term impact on the price level is controllable.

Interpreting Helicopter Money

The interpretation of helicopter money centers on its perceived effectiveness and the economic conditions under which it might be considered. In a scenario where an economy faces a severe demand shortfall and traditional monetary policy (such as lowering interest rates to near zero, also known as the zero lower bound) has lost its potency, helicopter money is theorized as a way to circumvent liquidity traps and directly stimulate spending. The crucial aspect is the unconditionality and permanence of the money injection, which, in theory, should induce individuals to spend rather than save, thereby boosting economic activity and driving up inflation towards target levels⁹. It's seen as a more direct way to influence consumer spending compared to other forms of quantitative easing.

Hypothetical Example

Imagine a country, "Economia," is experiencing a severe recession with high unemployment and persistent deflation. The central bank has already cut its benchmark interest rates to zero, and large-scale asset purchases (quantitative easing) have yielded limited results in stimulating the economy.

To counter this, Economia's central bank, in coordination with the government, decides to implement a helicopter money program. They announce that every adult citizen will receive a one-time direct deposit of $1,000 into their bank accounts, financed by newly created money.

The hope is that this direct injection of funds will encourage citizens to increase their consumer spending on goods and services, leading to:

1. Increased Demand: Households, with more disposable income, buy more, which in turn boosts aggregate demand.
2. Business Activity: Increased demand prompts businesses to produce more, potentially hire new workers, and invest, helping to reduce unemployment and increase overall economic output.
3. Inflationary Pressure: The larger money supply circulating in the economy begins to push up prices, moving the economy away from deflation.

If successful, the economy starts to recover, jobs are created, and prices stabilize at healthier levels.

Practical Applications

While the literal "helicopter drop" remains a theoretical concept, its underlying principle of direct money transfers to the public has been discussed and, in some forms, implemented, particularly during times of acute crisis.

• COVID-19 Pandemic Stimulus: During the COVID-19 pandemic, many governments, including the United States, issued direct stimulus payments to households. While these were generally financed by government borrowing rather than direct money creation by the central bank, some economists and policymakers argued that the sheer scale and intent of these transfers resembled the spirit of helicopter money, as central banks often bought significant amounts of the government debt issued to finance these payments, effectively increasing the money supply⁸.
• Combatting Deflation: Policymakers in countries like Japan, facing prolonged periods of deflation and low growth, have debated helicopter money as a radical option when other monetary policy tools have been exhausted⁷.
• Crisis Response: Helicopter money is considered an ultimate tool for a central bank to fulfill its mandate of price stability and full employment during a severe crisis, especially when the economy is in a liquidity trap and interest rates are at or near zero. The International Monetary Fund (IMF) has also discussed the concept in the context of global economic challenges, analyzing its potential implications for aggregate demand and inflation.

Limitations and Criticisms

Despite its theoretical appeal in extreme circumstances, helicopter money faces significant limitations and criticisms:

• Inflation Risk: The most prominent concern is the potential for uncontrolled inflation or even hyperinflation. If the money injection is perceived as permanent and not adequately sterilized or withdrawn later, it could lead to a loss of confidence in the currency and spiraling prices⁶. Economists like Raghuram Rajan have voiced skepticism about such policies being a panacea⁵.
• Central Bank Independence: Implementing helicopter money typically requires close coordination between the central bank and the fiscal authority (government). This blurs the lines between monetary policy and fiscal policy, potentially compromising the central bank's independence and opening the door to political pressure for ongoing money creation to finance government spending or to address the national debt³, ⁴.
• Irreversibility: Once money is directly distributed, it is challenging for the central bank to withdraw it from circulation, making the policy potentially irreversible. This contrasts with quantitative easing, where the central bank can, in theory, sell the assets it purchased².
• Moral Hazard: Critics argue that the expectation of future helicopter drops could create a moral hazard, where governments become less disciplined in their fiscal policy knowing that the central bank might step in.
• Effectiveness Debate: There is debate about whether individuals would actually spend the money or simply save it, especially in uncertain economic times. If a significant portion is saved, the desired boost to aggregate demand and economic activity would be diminished. Some analyses suggest that while effective in stimulating output and inflation, the long-run effects are similar to debt-financed fiscal stimulus, but money financing does not raise government debt in the short run¹.

Helicopter Money vs. Quantitative Easing

While both helicopter money and quantitative easing (QE) are unconventional monetary policy tools designed to stimulate an economy when interest rates are near zero, they differ fundamentally in their mechanism and perceived permanence.

The key distinction lies in the directness and perceived permanence of the money injection. Helicopter money bypasses the financial system to put money directly into the hands of the public, whereas QE works through asset markets and the banking system.

FAQs

Is helicopter money a real policy?

While the term is a metaphor, the concept of direct money transfers from the central bank to the public has been discussed by economists and, in some forms, has been approximated by fiscal stimulus measures in conjunction with central bank actions during severe economic crises.

What is the main goal of helicopter money?

The primary goal is to directly boost aggregate demand and stimulate economic activity by increasing the money supply and encouraging consumer spending, particularly when an economy is stuck in a liquidity trap or facing persistent deflation.

How does helicopter money affect inflation?

Theoretically, a direct and permanent increase in the money supply, without a corresponding increase in goods and services, would lead to higher inflation. The challenge lies in managing the extent and duration of this inflationary impact.

Is helicopter money the same as printing money?

Yes, in essence, helicopter money involves the creation of new money by the central bank which is then distributed. This expansion of the monetary base is often referred to as "printing money," although it typically occurs electronically rather than with physical banknotes.

Why is it called "helicopter money"?

The term originates from a thought experiment by Milton Friedman, who imagined a helicopter dropping money from the sky to illustrate a direct, unconditional, and sudden increase in the money supply.