Jul 6, 2021
Money from heaven: Decoding Helicopter money
Finance
Helicopter money means money “dropped from the sky”, or freshly created cash used to fund government projects or put directly into the hands of citizens when an economy enters into a recession (technically defined as the occurrence of negative GDP growth for two consecutive quarters). It is an unconventional monetary policy used to nudge the citizens to increase spending.
When is helicopter money used?
Popularized by American economist Milton Friedman in 1969, the premise of this concept is that when a central bank wants to raise output in an economy that is running substantially below potential (like the situation since last year), an effective tool would be simply to directly transfer money in everyone’s account. The idea is that you will go out and spend this money which will help boost economic activity.
How does it act as an economy booster?
According to economics pundits, “under certain extreme circumstances,” such as the onset of a recession, when politicians rule out a fiscal stimulus, helicopter drops “may be the best available alternative.”
Helicopter drops have a strong effect on economies jostling with deflation for a long time. Unlike changes to interest rates, the stimulus paid for by the central bank does not rely on increased borrowing from end-consumers. This reduces the risk of immediate inflation and adds to the potency of the financial system.
However…
Many argue that helicopter money being distributed like this, could instead make the recipients wary of the uncertain circumstances. In that case, they would rather save this money as a precaution for future use.
This argument was also supported by Mr. Raghuram Rajan (India’s former RBI governor) in an astute observation made by him when asked about helicopter money.
Rajan said that it isn’t necessary that the lucky people who pick up the new currency would go out to consume. He explained that somebody seeing the central bank distributing this money will think, ‘Has the world gone nuts? I’d better save much of this because I’m not sure what will happen.’
Quantitative easing measures like helicopter money and negative interest rates are no panacea in checking deflation in an economy. In Japan, negative rates haven’t really helped the economy in recovering from a deflationary environment.
In a pandemic-induced recession, if this tool is played out, most of the new money would end up being stored in bank accounts for precautionary reasons, and its creation might not have much impact on the broader economy.
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