Helicopter Money is a proposed unconventional monetary policy tool, suggested when the economy is in a liquidity trap, i.e. when the interest rates remain near zero and the economy is in recession.
This instrument consists of printing and distributing big sums of money to the public, hoping that people will spend it. In this way, central banks boost economic growth and avoid deflation.
Helicopter Money has these following objectives:
- Increasing monetary supply;
- Increasing inflation;
- Increasing the aggregate demand in case of failure of conventional monetary policies;
The name “Helicopter Money” was coined in 1969 by the American economist Milton Friedman, when he theorized the necessity of dropping money from a helicopter.
Friedman used this word to illustrate the effects of monetary policy on inflation and the costs of holding money, but this concept has been discussed by economists as an alternative to monetary policy tools such as Quantitative Easing (QE).
The concept of Helicopter Money was reintroduced as a policy proposal in the early 2000s. In fact, in November 2002 Ben Bernanke, who later would have become Federal Reserve Board chairman, said that Helicopter Money could always be an instrument to prevent deflation.
The early definition of Helicopter Money refers to a situation where central banks provide money directly to people, while a more modern use of the term considers other possibilities, e.g. a universal tax rebate to all households financed by the central bank.
In 2016 Japan considered applying Helicopter Money to promote the economic growth of the country, but financial markets showed concerns about the risk of hyperinflation and currency devaluation. Thus, the Bank of Japan (BOJ) adopted an alternative plan for increasing money in circulation.
What are the benefits?
Helicopter Money can increase the spending and the aggregate demand in greater way than QE.
His implementation can help to raise inflation and staving off the problems related to deflation, as well as improving the income distribution.
Which are the risks of Helicopter Money?
Unfortunately, the use of Helicopter Money could also cause several problems: the inflation could rise more than expected and central banks may lose credibility about their ability to control the price level.
Moreover, the implementation of Helicopter Money needs a coordination between government and central bank measures.
As I said before, Helicopter Money is an alternative to QE, but what is the difference between Helicopter Money and QE?
Both instruments aim to increase inflation and provide for money creation by central banks in purpose to expand the money supply. They also encourage consumption, even if, as regards QE, this is only an indirect effect.
The difference is that under QE, central banks issue money in order to purchase large amounts of government bonds and other financial assets, while the Helicopter Money involves the distribution of money to the public.
The implementation of QE reduces the interest rates, boosting investments and production. The interest rates reduction could allow the governments to cut taxes or to increase public spending.
On the other side, Helicopter Money would directly increase the aggregate demand for goods and services, and, as a result, would have a direct impact on the real economy, stimulating consumption and economic growth.
However, Helicopter Money is a riskier monetary policy tool and many economists have criticised it during the years.
Some of them believe that people could be led to save the money received instead of spending it, especially during an economic crisis.
Besides, the increase of aggregate demand could cause a disequilibrium in the balance of payments, in case of an increased demand for foreign goods.
In addition, the name “Helicopter Money” can cover many ideas of policy, such as direct transfers into people’s bank accounts carried out by the central bank. This specific concept can’t be applied in the eurozone, because the ECB can’t directly give money to people in accordance with the Treaties.
Nevertheless, as Mario Draghi said in 2016 ‘helicopter money can take different forms and can mean different things to different people’. In fact, “Helicopter Money” can alternatively refer to the commitment of the governments to cut taxes and increase unemployment benefits. This operation is financed by the central bank through the purchasing of government bonds.
In this case, with the implementation of Helicopter Money the central banks could exceed their objectives; in fact, the fiscal policy isn’t part of them.
Moreover, governments could use this policy to gain public consensus.
Here the question arises: can this much-criticised tool be used to deal with the COVID-19 crisis?
Many economists consider Helicopter Money as a potential solution and some countries are starting to think about its implementation.
At the end of February, Hong Kong’s Government announced a distribution of HK $10.000 (worth about 1.175€) to every adult citizen to fight the health and economic crisis.
This measure has been called by the media “Helicopter Money”, but according to someone it can’t really be considered as such, because this distribution of money doesn’t involve printing money and increasing public debit, but it’s done by using fiscal reserves.
In April, the Prime Minister of Japan Abe Shinzo has promised a distribution of 100.000 yen (853€), starting at the beginning of May.
As regards the eurozone, the President of the European Central Bank Christine Lagarde has confirmed that “the Governing Council of the ECB has never discussed the issue of Helicopter Money”.