What is Helicopter Money?
Wouldn’t it be amazing if one fine day, you get a message from your bank saying that, $X, has been credited in your account. Sounds like a miracle and once in a blue moon affair, isn’t it? So, is helicopter money. To tell you in layman’s term, helicopter money is free irreversible money distributed to the end consumers.
How is the helicopter money transferred?
- Simply by transferring money into people’s bank account
- By reducing taxes, the disposable income in people’s hand increase.
Why is helicopter money used?
- To take an economy out of recession and slowdown
- When interest rates are negative or near zero
So, the end goal of helicopter money is to increase demand consumer, to increase growth, inflation rates in the country and thus bringing recovery. This concept may sound like Quantitative Easing (QE) but it is different than QE.
What is Quantitative easing and how is it different from Helicopter money?
Quantitative easing is a process with which central bank can introduce more money into the market by purchasing government bonds, which in turn brings more liquidity in the market. But the impact of QE is indirect, unlike Helicopter money. QE is a temporary and reversible measure that central banks take to bring liquidity in the market. Helicopter money is irreversible, and it directly increases the monetary base of the end consumers.
Helicopter Money was drafted in the year 1969 by Milton Friedman. It is beneficial for economies which have low rate or sub-zero inflation rates.Many economist’s say that is a full proof method to get out of the slump scenario in the country. Hence, Japan is trying to implement it.
Is it as easy as it sounds?
- Some consumers may like to save the money instead of spending it.Which might not lead to the spendings and demand that is desired for growth.
- Printing more money may lead to currency devaluation, which in turn hampers economic recovery.
The concept may look simple and right theoretically, but, there are a lot of challenges to apply it. Coordination of both monetary and fiscal policy is required. When Japan applies the stimulus, it will be interesting to watch, if the money is distributed equally and spendings are made as per expectations. If the theory helps Japan, many other countries might want to reconsider Helicopter money as an option to bring economic progress.