What is Helicopter Money?
Helicopter money, also known as a helicopter drop, refers to an unconventional monetary policy tool of printing large sums of money (expanding money supply) and distributing it to the public to spur economic growth during a recession. The term was invented by Milton Friedman, an American economist and statistician, in his famous paper, “The Optimum Quantity of Money” (1969).
- Helicopter money pertains to an unconventional monetary policy tool that involves printing large sums of money and distributing it to the public to spur economic growth.
- American economist and statistician Milton Friedman invented the term “helicopter money.”
- Key criticisms of helicopter money include (1) its irreversibility, (2) the potential for hyperinflation, and (3) the devaluation of the domestic currency.
Understanding Helicopter Money
Helicopter money is a money transfer from the central bank to the public (via the government), with the aim of boosting economic output and inflation. The theory behind helicopter money is that money handed to the public (consumers) would increase their disposable income, resulting in increased consumer spending that would ultimately boost economic output.
Although first mentioned by Friedman, the term gained more widespread acknowledgment when former Federal Reserve Chairman Ben Bernanke made a reference to a helicopter drop in a 2002 speech on preventing deflation. In that speech, Mr. Bernanke said, “a money-financed tax cut is essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.”
The current opinion on helicopter money is that it should be seen as a last resort monetary policy tool when more commonly used stimulus has failed to revitalize the economy. Helicopter drop has not yet been implemented in modern society.
Helicopter Money vs. Quantitative Easing
Helicopter money has commonly been misconstrued as quantitative easing. Although both are monetary policy tools that expand the money supply, the impact on the central bank’s balance sheet is different.
For quantitative easing, the central bank creates reserves by purchasing government securities from commercial banks and other financial institutions. On the other hand, helicopter money involves giving away money to the public, which does not increase assets on the central bank’s balance sheet.
Essentially, helicopter money increases the money supply by distributing currency to the public, while quantitative easing increases the money supply by purchasing government securities.
Criticisms of Helicopter Money
Key criticisms of helicopter money include:
1. Helicopter money is irreversible
Given that money is provided directly to consumers, helicopter money – as opposed to quantitative easing – is irreversible. It has led to many economists arguing that helicopter money is not a suitable long-term solution to spur economic growth.
2. Helicopter money leads to hyperinflation
Helicopter money could undermine the value of the local currency, as consumers would lose a sense of what the currency is worth. As a result, helicopter money could lead to over-inflation.
3. Helicopter money devalues the domestic currency
As more of the domestic currency is printed, the value of the domestic currency could decrease significantly. As a result, it may discourage the purchase of domestic currency by currency speculators.
Many economists characterize Japan as a stagnant, or slow-growing, economy. Taken from Trading Economics, the following shows Japan’s GDP growth rate from 2010 to 2020.
Struggling to revitalize the Japanese economy, in 2016, Bernanke met with then-Japanese Prime Minister Shinzo Abe and current Bank of Japan Governor Haruhiko Kuroda to discuss policies that could stimulate economic growth. During the meeting, the use of helicopter money was proposed. However, in the end, such a monetary policy was abandoned due to fears of hyperinflation and currency devaluation.
CFI offers the Certified Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: