News : Telangana chief KCR asks RBI to go for ‘helicopter money’, increasing FRBM limits.
News : The U.S. needs more “helicopter money” to help its economy recover from the effects of the coronavirus pandemic, said Anthony Scaramucci, a hedge fund investor who briefly served as President Donald Trump’s White House communications chief.
What is Helicopter Money
Helicopter Money, also known as the helicopter drop is an unconventional and a hypothetical monetary policy tool involving the printing of huge amount of money to be distributed to the public for stimulating the economy.
- It is a metaphorical term alluding to unconventional measures followed to kickstart the economy during deflationary periods.
- Helicopter money is the term used for a large sum of new money that is printed and distributed among the public, to stimulate the economy during a recession or when interest rates fall to zero.
- It is also referred to as a helicopter drop, in reference to a helicopter scattering supplies from the sky.
“Helicopter Money”: Its Origin
- Milton Friedman a noted economist was the first one to use the term “Helicopter Money”. However, the term gained popularity in 2002 when the then Federal Reserve Governor Ben Bernanke made a reference to the term in his speech.
Helicopter Money – In detail:
- Despite the fact that the original idea of a helicopter drop sets out a description of payments being made directly to the individuals, economists make use of the term while referring to a wide range of policy ideas like the permanent monetization of budget deficits including elements of attempting to shock beliefs regarding future inflation or the nominal growth of GDP, with the view of changing expectations.
- Another series of policies, similar to the original description of helicopter money, and more innovative in the context of monetary history, involves the central bank making direct transfers to the private sector financed with base money, without the direct involvement of fiscal authorities. This has also been referred to as a citizens’ dividend or distribution of future seigniorage.
- It is sometimes suggested as an alternative to Quantitative Easing when the economy is in a liquidity trap (a state of the economy where the interest rates are nearing zero and recession persists in the economy).
- According to the proponents of the term, it is a efficient way for increasing the aggregate demand, specifically in the situation of a liquidity trap, when the central bank has reached the Zero Nominal Lower Bound
- Although the original definition of helicopter money describes a situation where central banks distribute cash directly to individuals, more modern use of the term refers to other possibilities, such as granting a universal tax rebate to all households, financed by the central bank.
Helicopter money - Examples
- If a country faces slow or no growth, it could consider a helicopter drop. For example, in 2016, Japan considered using helicopter money to assist with the country’s slowing growth.
- Financial markets showed concerned with the decision, as participants feared hyperinflation and currency devaluation.
- So, the Bank of Japan (BoJ) opted for an alternative method to increase monetary supply.
- This included different partnerships and purchases such as government bonds, infrastructure outlays and payments to lower-income earners.
Helicopter money - Pros
- Helicopter money does not rely on increased borrowing to fuel the economy, which means that it doesn’t create more debt and interest rates can remain unchanged.
- Generally, helicopter money boosts spending and economic growth more effectively than quantitative easing because it increases aggregate demand – the demand for goods and services – immediately.
- While government money drops that come from debt might not boost consumer spending, due to the debt needing to be repaid, it is often thought that ‘money finance’ will stimulate the economy.
Helicopter money - Cons
- Unlike quantitative easing, using helicopter money as a tactic is not reversible, and many argue that it’s not a feasible solution to revive the economy.
- A country’s central bank sets its interest rates to reach economic growth targets. However, a helicopter drop means that a central bank cannot use interest rates to recover any costs, because the money is not linked to a borrowed asset (loan).
- Instead, the money is given directly to the public. This may lead to over-inflation and cause damage to the central bank’s financials.
- One of the main risks associated with helicopter money is that it could lead to a significant devaluation of the currency on the foreign exchange market.
- As more money is printed and supply increases, the value of the domestic currency could significantly decrease. It could also discourage speculators from buying the currency as it is less likely to perform well.