Published: 20th Apr, 2020
With the Covid-19 pandemic here to stay for a long time and traditional monetary and fiscal policies limited in their efficacy, governments and central banks are looking at ways to avert an economic catastrophe. Some economists propose that non-repayable money transfer from the central bank to the government, which is ‘helicopter money’.
Context
With the Covid-19 pandemic here to stay for a long time and traditional monetary and fiscal policies limited in their efficacy, governments and central banks are looking at ways to avert an economic catastrophe. Some economists propose that non-repayable money transfer from the central bank to the government, which is ‘helicopter money’.
About
- 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.
- Coined by the American economist Milton Friedman in 1969, helicopter money refers to a last resort type of monetary stimulus strategy to spur inflation and economic output.
- It includes printing large sums of money and distributing it to the public so that people can spend more and boost the economy.
- It also requires both monetary and fiscal policies to be carried out together, meaning central banks and governments cooperating with each other.
Is it similar to quantitative easing?
- Helicopter money is an unconventional alternative to quantitative easing, but both aim to boost consumer spending and increase inflation.
- While helicopter money increases monetary supply by distributing large amounts of currency to the public, quantitative easing increases supply by purchasing government or other financial securities to spark economic growth.
Significance of helicopter money:
- No debt: Helicopter money does not rely on increased borrowing to fuel the economy, which means that it doesnot create more debt and interest rates can remain unchanged.
- Economic growth: It boosts spending and economic growth more effectively as it increases aggregate demand – the demand for goods and services – immediately.
Disadvantages of helicopter money:
- Not reversible: Unlike quantitative easing, using helicopter money as a tactic is not reversible. It is not a feasible solution to revive the economy.
- No change on interest rate: 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).
- Over-inflation: Instead, the money is given directly to the public. This may lead to over-inflation and cause damage to the central bank’s financials.
- Significant devaluation of currency: It could lead to a significant devaluation of the currency on the foreign exchange market.
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