Key Takeaways
- Central bank directly gives money to the public.
- Aims to boost spending and inflation during recessions.
- Irreversible and expands monetary base without asset gains.
- Differs from QE by bypassing banks and bond purchases.
What is Helicopter Drop (Helicopter Money)?
Helicopter Drop, also known as helicopter money, is an unconventional monetary policy where a central bank creates new money and distributes it directly to the public to stimulate spending and boost economic output. This method is typically used during recessions or liquidity traps when interest rates are near zero and traditional policies are ineffective.
The concept originated from economist Milton Friedman and involves increasing the monetary base without acquiring assets in return, differing from policies like quantitative easing. Helicopter money requires coordination between monetary and fiscal authorities to finance government deficits permanently rather than through bonds, making it distinct from standard fiscal stimulus or asset purchase programs.
Key Characteristics
Helicopter money has several defining features that set it apart from other monetary tools.
- Direct Cash Transfers: New money is given directly to households or businesses, increasing disposable income immediately.
- Monetary-Fiscal Coordination: Central bank finances government spending without expecting repayment, unlike traditional bond purchases.
- Irreversibility: Once distributed, the money cannot be easily retracted, limiting future policy flexibility.
- Inflation Targeting: Aims to boost inflation and demand when rates are at or near zero, addressing deflation risks.
- Balance Sheet Impact: Increases liabilities of the central bank without acquiring assets, unlike quantitative easing.
How It Works
Helicopter money works by expanding the central bank’s monetary base and funneling this new money directly to the public, often via government transfers or tax cuts. This increases households’ nominal income, encouraging immediate consumption and raising aggregate demand.
Unlike conventional policies that rely on lowering interest rates or purchasing assets like government bonds, helicopter money bypasses financial intermediaries and aims to stimulate the economy more forcefully in situations where interest rates are close to zero. This direct injection can shift inflation expectations and help avoid deflationary spirals.
Examples and Use Cases
While no major economy has fully implemented pure helicopter money, approximations and related policies illustrate its use and potential.
- COVID-19 Stimulus Payments: The U.S. government issued direct payments to individuals during the pandemic, a helicopter money-like approach though partly funded by bonds and combined with quantitative easing.
- European Central Bank TLTROs: Negative interest rate loans to banks effectively transferred monetary value indirectly, aligning with helicopter money principles.
- Japan's Abenomics: The policy mix under Abenomics flirted with helicopter money ideas, including BOJ-funded fiscal expansions.
- Bank Stocks Impact: Policies like helicopter money influence sectors such as banking, making bank stocks sensitive to such unconventional monetary actions.
Important Considerations
Before considering helicopter money as a policy tool, be aware of its potential risks and limitations. The irreversible nature of direct money distribution can lead to loss of central bank independence and complicate future monetary tightening.
Additionally, excessive use risks hyperinflation and currency devaluation, which can harm economic stability. The effectiveness depends on recipients spending the money rather than saving it, and it is often seen as a last-resort measure when both conventional monetary policy and fiscal stimulus funded by debt have limited impact.
Final Words
Helicopter money directly injects cash into the economy to spur spending when traditional tools fall short, but it carries risks like inflation and loss of central bank independence. Monitor policy signals closely and consider consulting a financial advisor to understand how such measures might impact your personal finances.
Frequently Asked Questions
Helicopter money is an unconventional monetary policy where a central bank creates money and distributes it directly to the public to encourage spending, boost economic growth, and increase inflation, especially during recessions or when interest rates are near zero.
Unlike QE, where the central bank buys assets from banks and can reverse the process by selling them, helicopter money directly increases public income without acquiring assets and is irreversible once distributed. Its main goal is to boost demand and inflation through direct spending.
The term was coined by economist Milton Friedman in 1969, using the metaphor of dropping cash from a helicopter to illustrate how monetary policy can directly increase inflation and stimulate the economy.
No major economy has implemented pure helicopter money, meaning literal cash drops. However, some policies like the U.S. COVID-19 stimulus payments and the European Central Bank's 2016 TLTROs are considered approximations or variations of the concept.
Helicopter money can take several forms, including direct cash transfers to individuals, central banks financing government deficits without expecting repayment, and indirect measures like negative interest rate loans to banks that pass value to the public.
Once helicopter money is distributed directly to the public, it increases nominal income immediately and cannot be withdrawn or reversed by the central bank, unlike asset purchases used in quantitative easing.
Helicopter money aims to stimulate spending and raise inflation during times of economic downturns or liquidity traps when traditional monetary policy tools, like lowering interest rates, are no longer effective.
