A helicopter money drop is a form of monetary policy in which a Central Bank prints money and distributes it directly to households/consumers. The aim of helicopter money is to boost nominal GDP, overcome deflation and help reduce unemployment. In normal circumstances, printing money will be inflationary. Economists usually suggest helicopter money in a liquidity trap and period of deflation.
The idea of a ‘helicopter money has been referred to by Milton Friedman and picked up by the Chairman of the Federal Reserve, Ben Bernanke. One image of ‘helicopter money is a helicopter dropping cash from the sky, which presumably would be picked up and spent pretty quick. On a more practical vein, it could involve the Central Bank sending a cheque in the post to people across the country.
In a period of severe deflation, the cash sent could even have an expiry date. Meaning you have to spend it in 6 months or lose it. This expiry date will prevent people just saving it.
Purpose of Helicopter Money Drop
- Increase the money supply
- Target higher inflation
- Increase aggregate demand in the economy when conventional monetary policy has failed. (e.g. in a liquidity trap with zero nominal interest rates)
Difference between Helicopter Money and Quantitative easing.
Quantitative easing is a form of money creation in which a Central Bank, creates money and buys government bonds. Quantitative easing is usually reversible, which means Central Bank could later sell government bonds. Therefore the main differences between the two are:
- Helicopter money goes direct to consumers and households – rather than banks and financial institutions who sell bonds to the Central Bank.
- Helicopter money is non-reversible. Presumably, once the money is created, it is harder for Central Bank to reverse the decision.
Advantages of Helicopter Money
- It should have a much greater impact on boosting spending and aggregate demand than quantitative easing. Evidence from Quantitative easing is that banks have tended to sit on the extra money and not lent it out. Quantitative easing has been relatively ineffective in a balance sheet recession.
- Can target higher inflation, which helps to avoid problems related to deflation and debt deflation.
- Better distribution. A criticism of quantitative easing is that it has benefited banks more than anyone else, and given the role of banks in the financial crisis, this is considered unfair. The recession and fiscal austerity has hurt lower-income groups, the helicopter drop would help income redistribution.
Problems of Helicopter Money
- Inflation could increase more than expected.
- Central Bank could loose ‘inflation credibility’
Fiscal Policy and Helicopter Money
Helicopter money is a way to create direct spending in the economy. However, this could also be achieved through expansionary fiscal policy financed by quantitative easing. Fiscal policy enables spending on infrastructure rather than just consumer spending. The impact should be similar because the expansionary fiscal policy will ensure the extra money is spent rather than languishing in banks.
Turning Quantitative Easing into Helicopter Money
Recently, Lord Turner suggested the Bank of England could write off some of the £375bn government debts. In effect, this would be printing money to pay off government debt. Rather than reversing quantitative easing, the money creation becomes permanent. BBC link
Would Helicopter Money have been better than Quantitative Easing?
Given the poor performance of the UK economy since 2008, would we have been better off with helicopter money rather than quantitative easing? Quite possibly. With helicopter money, we might have seen a quicker economic recovery.