Helicopter Money

Helicopter money policy, in economics, refers to a monetary policy that releases substantial sums of money into the economy through various channels. Its primary purpose is to combat deflationary pressures and stimulate the nation's GDP (Gross Domestic Product).

The concept of helicopter money finds major application in monetary policies. It aims to boost consumer spending among households and savers, increasing demand for goods and services. In doing so, it seeks to address deflationary trends and help stabilize the inflation rate in the economy. However, excessive money circulation can potentially lead to hyperinflation.

• Helicopter money, also known as a helicopter drop, is a government policy involving central banks printing excess money and distributing it to the public.
• The primary objectives of helicopter money are to combat deflation, boost aggregate demand for goods and services, and stimulate the economy's GDP.
• The concept of helicopter money dates back to 1969 when American economist and statistician Milton Friedman first described it in his book "The Optimum Quantity of Money." In this concept, a metaphorical scenario involves a helicopter flying over a city and dropping money.
• Unlike helicopter drop, in quantitative easing, central banks buy government bonds to stimulate the money supply. 

The helicopter money policy involves the government allowing central banks to create additional money and inject it into the economy to counter deflation. As a result, individuals have more cash on hand, encouraging increased spending. This, in turn, boosts demand, stabilizes economic growth, and is metaphorically known as the "helicopter drop." For instance, during the Covid-19 pandemic, the United States implemented a form of helicopter money.

Various factors can lead to the implementation of helicopter money, with major triggers being deflation, reduced aggregate demand, and decreased consumer spending. When individuals opt for saving rather than spending, it can disrupt cash circulation within the economy. In response, the government adopts effective monetary policies to counter deflation, but helicopter money becomes a last-resort option if these measures fail.

Two primary methods exist for implementing the Friedman helicopter money policy. Firstly, the government can infuse the economy with additional money by increasing the money supply through various channels, giving consumers more cash for goods and services. This approach simultaneously stimulates demand for goods. The second method involves the central bank distributing funds directly to individuals.

Despite its effectiveness in combating deflation, helicopter money comes with potential consequences. The treasury typically issues bonds to the central bank in exchange for the injected funds. The central bank then deposits the balance with the Treasury, further redistributing it among households and businesses through various programs. However, commercial banks may prefer assets other than additional reserves, prompting them to exchange these reserves for government bonds. As a result, the central bank's assets and liabilities undergo adjustments.

Let us look into a few examples:

Example #1

Consider the 2020 Covid-19 pandemic, where economies pumped cash into their respective nations. Before that, the purpose of helicopter drop was to overcome deflation. However, excess printing became necessary in the later stages of the global crisis. The households and businesses had no access to funds. Thus, the federal government injected cash into the economy through the Coronavirus Aid, Relief, and Economic Security Act (CARES) program. As a result, everyone could access money. In contrast, banks can invest these reserves in government bonds as a part of the investment. 

However, excess printing led to a high inflation rate. Therefore, the federal government tends to increase interest rates to curb this phase. On the contrary, people will withdraw their money instead of holding it. So, if banks have invested in bonds, it can lead to a financial crisis. 

Example #2

Japan is one of the notable countries that have used a form of helicopter money. In response to economic stagnation and deflation, the Bank of Japan introduced policies involving direct cash distributions to citizens. This approach aimed to stimulate consumer spending and combat deflationary pressures. Similar to other instances of helicopter money, Japan's experiment had both positive and potentially concerning outcomes.

Let us look into the pros and cons of helicopter money:

Pros of Helicopter Money:

• It can combat deflationary pressures by injecting additional funds into the economy. This encourages spending, boosts demand for goods and services, and helps stabilize prices.
• One advantage is that the government can implement it without borrowing funds from external sources. It can independently create and inject money into the economy, which can be beneficial in certain circumstances.
• This strategy has the potential to enhance the GDP of the economy by stimulating economic activity and encouraging consumer spending.
• When helicopter money is implemented, there is no immediate need to accumulate additional government debt, as the funds are injected directly into the economy.
• By providing individuals with additional cash, helicopter money increases the purchasing power of consumers. This often leads to higher consumer spending rates, driving economic growth.

Cons of Helicopter Money:

• Once helicopter money is distributed, it cannot be easily reversed. This lack of reversibility can be a concern if the policy has unintended consequences or if economic conditions change.
• Excessive distribution or printing of money can result in hyperinflation, where prices skyrocket, and the currency's value rapidly declines. This poses a significant risk to the stability of the economy.
• High levels of money creation can lead to currency depreciation, potentially causing the devaluation of the national currency. This can negatively impact international trade and the purchasing power of citizens.

Although helicopter money and quantitative easing target economic growth and involve central banks, they have distinct features. So, let us look at their differences:

This article has been a guide to Helicopter Money and its meaning. We explain its examples, comparison with quantitative easing, pros, and cons. You may also find some useful articles here -

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