The concept of “helicopter money” has recently been highlighted in the news, as Telangana Chief Minister proposed its usage as a possible solution to the economic fallout caused by the Covid-19 pandemic. This unconventional monetary policy tool raises several questions about its mechanisms and effectiveness.
Understanding Helicopter Money
Helicopter money refers to an unconventional monetary policy tool that involves generating large quantities of currency and distributing it directly to the public. The purpose of this action is to stimulate the economy during periods of recession or when interest rates fall to zero.
In practice, it involves a central bank increasing the money supply directly and then using governmental mechanisms to distribute this new cash to the population. The ultimate goal is to boost demand and inflation. This term was devised by American economist Milton Friedman and suggests an image of a helicopter spilling money from the sky.
Helicopter Money Vs. Quantitative Easing: A Comparison
While both helicopter money and quantitative easing share the objective of promoting consumer spending and boosting inflation, they should not be misconstrued.
Helicopter money involves disbursing money to the public with zero repayment responsibility. In contrast, quantitative easing involves printing money, which central banks then employ to buy government bonds. In the case of quantitative easing, the government is liable to repay for the assets purchased by the central bank.
Potential Benefits of Using Helicopter Money
The key advantage of helicopter money is that it doesn’t depend on amplified borrowing to kick-start the economy. This means that unlike many other forms of stimulus, it does not add to national debt.
Furthermore, helicopter money can potentially boost spending and promote economic growth more effectively than quantitative easing, as it directly increases aggregate demand, or the demand for goods and services, instantly.
Concerns Associated with Helicopter Money
Some critics argue that helicopter money is infeasible as a tool for reviving the economy, mainly due to its lack of repayment obligation. In particular, they fear it will trigger over-inflation and devalue the currency in foreign exchange markets.
In summary, while the concept of helicopter money may seem like an attractive solution to economic crises due to its apparent ease of implementation and immediate impact on public spending, it also raises significant concerns about currency stability and inflation control. As such, policymakers must carefully weigh these factors when considering its use.