Helicopter money

The concept of helicopter money has recently gained increased attention in the media. The main reason for this increased interest in a concept that is actually already several decades old is the following. Since the financial crisis of 2008, some developed markets continue to suffer from low inflation and low growth. In particular, both the Eurozone and Japanese economy seem to have stalled. The low inflation (and even deflation in some countries) has led central banks to consider new ‘unconventional’ tools of monetary policy. One of the most controversial and extreme policy options that is currently considered is helicopter money.

But what does a ‘helicopter drop of money’ mean? What does such a policy look like and why do economists think it might increase inflation? This page covers the definition of a ‘helicopter drop of money’ and explains the main consequences of such a policy.

Definition helicopter money

The idea of a ‘helicopter drop’ of money was first introduced by Milton Friedman in 1948. The following definition from Friedman’s 1969 paper ‘The optimum Quantity of Money’ provides a useful starting point of what Friedman meant by helicopter money

“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.” (The Optimum Quantity of Money, 1969)

From this the definition it should be clear that helicopter money simply refers to a one-time transfer of money from the central bank to households. In that sense, helicopter money can be seen as a type of “quantitative easing (QE) for the people“. Unlike QE, which is channeled through the banks, helicopter money is channeled directly to the individual households. It skips the financial sector and should, at least in theory, be more effective when the traditional transmission channels no longer work.

In practice, the policy will probably be structured in one of the following ways. In particular, it

  • could be in the form of a tax cut or an increase in public spending
  • can either be a one-time intervention or it might be repeated over time
  • will involve the creation of bank deposits instead of bank notes
  • will be deposited in the government’s account, after which it is transferred to households

How is helicopter money created?

But how will these ‘new deposits’ be created? There’s several ways in which the central bank can create additional deposits. For example,

  • the central bank can directly credit the current account of the government and add on its balance sheet an asset that is a non-interest-bearing non-redeemable receivable
  • Alternatively, the government can issue new government bonds which the central bank purchases on the primary market. The central bank can then convert the bonds to non-interest-bearing non-redeemable bonds
  • Finally, the government can also issue government debt, which the central bank purchases and holds. Every time the bonds expiry, the central bank should purchase new bonds (i.e. roll over perpetually). The central bank in this case returns to the government as profit the interest income it receives from the government.

In the last case, the central bank has to credibly commit in advance that it will actually rollover the bonds perpetually. If the central bank does not do this in a credible way, households will realize that the debt will have to be paid back sooner or later. In that case, households will probably won’t spend the money. Instead, they will save the money they have available thanks to the tax cut to pay the future taxes  that will be levied to repay the debt.

Consequences helicopter money

The aim of helicopter money is to spur economic growth through the creation of inflation. Handing out deposits to households increases their disposable income. We can expect most of the households to spend this windfall. Households that don’t spend the money, will end up with money that has decreased in value. This is because the spending behavior of the other households will lead to an increase in the price level (i.e. inflation). Moreover, the higher inflation will also cause households’ savings to drop in value. Hence, households might also become more inclined to spend even more money, beyond the helicopter money they received.

Summary

Helicopter money refers to a policy where the government transfer a sum of money to the households directly by creating money. It aims to increase households’ consumption and the level of inflation. It is a policy that is taboo today but could become a reality when developed countries are confronted with deflation.

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