Helicopter Money
An alternative to Quantitative Easing
Background
Helicopter Money is a theoretical monetary policy that was first proposed by Milton Friedman in 1969. For those unaware, Milton Friedman was kind of a big deal when it comes to economics, winning the Nobel Prize and being an adviser to Ronald Reagan.
Monetary policy refers to the process that a central bank or similar organization can employ to affect the money supply in the economy. In the modern economy, the mechanism that a central bank would use to affect the money supply is through influencing interest rates.
In certain cases however when interest rates are already near zero and the central bank would like economic activity to increase, it needs to employ further policies. As we have previously seen one such policy that is widely been in use since the financial crisis, is Quantitative Easing.
Helicopter Money is a policy that could potentially be used instead of Quantitative Easing.
Helicopter Money: What is it?
The Helicopter Money (HM) theory, in its original thought experiment form, talks about the government throwing money out of a helicopter. The idea is that the money will go directly to the everyday people which will then have higher disposable cash, who in return will buy more goods and services and start a new wave of economic activity in the economy.
In the modern world, however, the implementation would look somewhat different than the original thought experiment. Instead, consumers would wake up one morning, and would find extra payments in their bank accounts, courtesy of the central bank!
The supporters of this theory, believe that there are real advantages of Helicopter Money over QE. QE results in over-inflated asset prices in both the debt and equity markets, whereas HM would very rarely make its way to those assets.
On the other hand, HM could potentially cause excess inflation and result in the devaluation of the currency and decrease in its purchasing power.
Other alternatives to QE
Dr. Ben Bernanke, the Chairman of the Fed in 2002, revived the Helicopter Theory when he suggested it as an alternative to quantitative easing. In his version of the implementation, he had suggested that the government issues tax rebates to people that are essentially funded by the central bank.
Of course, another alternative to QE is deficit spending. The government could undertake a massive scale (infrastructure) projects that would inject a lot of money into the economy and thus re-start economic growth. Once again, however, this doesn’t come without risks. In the US, during the Vietnam war, deficit spending caused a devaluation of the dollar and spiked inflation.
You may also like:
