What is Helicopter (Drop) Money and How Does It Impact the Economy?
During times of recession, the purchasing power of individuals falls. This leads to a decrease in overall demand for goods and services across a country. To avoid economic deflation, the government resorts to various financial measures, such as quantitative easing and contractionary monetary policy. Among them, an unusual and unconventional monetary tool to combat recession is helicopter money.
Helicopter drop, or helicopter money, refers to the mass printing of currencies and their distribution to the public during a recession to spur economic growth. Keep reading to understand how helicopter money works, its example and how it impacts the economy.
What is Helicopter Money?
Helicopter money is an unconventional monetary tool that refers to printing large sums of currencies and distributing it to the public to drive economic growth during recession. This term was first coined by Milton Friedman in 1969, who was a renowned American statistician and economist.
Although the concept of helicopter money is quite old, it gained immense popularity in 2002, when Ben Bernanke, the US Federal Reserve Governor, made a reference to this monetary tool during a speech. It is an unconventional method, and most countries try to avoid implementing this policy as this could lead to over-inflation in the long term.
How Does Helicopter Money Work?
Helicopter drop, in simple terms, is a money transfer from the central bank of a country to the public through the government. The primary aim behind this initiative is to boost a country’s economy. The helicopter money concept is that the excess money handed to the public would increase their disposable income. This increased consumer spending will, in turn, boost the economy during a period of recession.
Having said that, the original definition of helicopter money dealt with the printing of more currencies. However, a few modern applications of this concept suggest various possibilities, such as a universal tax rebate to households granted by the central bank. In today’s era, economists also tend to use the term to suggest a wide range of policies that are directed toward reviving the economy during deflationary periods.
Also Read: Paper Money – History & Usage Explained
Example of Helicopter Money
One of the most recent examples of helicopter money theory coming into play was the US government’s fiscal policy enacted in response to the COVID-19 pandemic. In addition to introducing financial measures, the government issued cheques amounting to $99,000 for every single American citizen and cheques of $198,000 for every couple. However, this amount depended on the income each individual mentioned in the tax returns.
By providing these cheques, the government aimed to boost the spending capacity of citizens, henceforth spurring the economy.
What are a few Criticisms of Helicopter Money?
Helicopter drop could be helpful during deflationary monetary conditions. However, indiscriminate use of this policy is highly discouraged. This unconventional policy has faced criticism on various fronts, such as:
1. It is Irreversible:
Once provided to an extended population, helicopter money cannot be taken back. Thus, experts argue that this tool is unsuitable for long-term economic growth.
2. Can Lead to Hyperinflation:
Helicopter money can undermine the local currency’s value. This is because consumers lose sense of the actual worth of money. Moreover, inflation rises due to increased availability of money in an economy.
3. It Devalues Domestic Currency:
As more and more currency is printed, currency’s value decreases substantially. This could discourage speculators from purchasing domestic currency.
Is Helicopter Money Good for the Economy?
As mentioned above, helicopter money in terms of economics helps increase the availability of money in a country.
A recent example of this concept can be traced back to the pandemic when Telangana CM suggested RBI adopt this policy to revive the economy. He suggested the central bank distribute 5% of GDP to the state governments without interest.
The primary assumption with this tool is that when people receive extra money, instead of saving, they spend it on goods or services, driving economic growth. However, due to the various criticisms that helicopter money brings along, including severe inflation, decreased currency value, etc., this might not be a viable solution in all circumstances.
Alternatively, the RBI features other monetary tools that can help spur the economy, such as a decrease in the repo rate.
What are the Advantages of Helicopter Money?
Apart from some criticisms, the helicopter money theory can be extremely useful during a few circumstances. Mentioned below are a few benefits of this monetary tool:
- Helicopter money does not increase debt, and the interest rate also remains unchanged
- This method boosts the economy significantly because it increases the aggregate demand immediately
- If a government allows more debt to individuals, it might not spur the economy because the debt needs to be repaid. However, money finance holds the capacity to stimulate the economy
What are the Disadvantages of Helicopter Money?
When a monetary tool comes into action, it brings several benefits and drawbacks. Here are a few cons of helicopter drop:
- This method is irreversible. Thus, it might not be a feasible solution to grow the economy
- Typically, a country’s central bank puts forth interest rates to reach growth targets. However, in the case of helicopter money, the country cannot use interest rates to recover any amount of money. This can lead to over-inflation and damage the assets of the central bank
- It can lead to a devaluation of the domestic currency in the foreign exchange markets. Thus, speculators will be discouraged from purchasing a currency that is not likely to perform well
Also Read: What is Money Flow Index (MFI) and How to Use it in Trading?
Final Word
While helicopter money helps the government combat economic recession, this tool should be used wisely. The government, along with the central bank, should devise effective measures to combat deflation in the economy and come out with long-term solutions.
FAQs
Ans: In quantitative easing, the RBI creates reserves by purchasing government securities from financial institutions and commercial banks. This helps in increasing the money supply in an economy. Oftentimes, quantitative easing is considered a viable way to control recession, as opposed to helicopter money.
Ans: Helicopter money can help in economic revival in certain situations. However, it also features various criticisms. In simple words, printing more money and distributing it into the economy can lead to over-inflation, which is bad for a country. Thus, the use of helicopter money should come into play only during unprecedented times when all other measures fail.
Ans: When a government prints and distributes more currency to the citizens, they tend to spend that extra money on several products and services. This helps drive consumer demand, which could be beneficial during recession times.
Ans: One of the most significant disadvantages of quantitative easing is that it can bring in over-inflation in a country. As inflation rises, it leads to increased interest rates in the long run. This isn’t good for the economy as it can disrupt financial stability in an economy.
Ans: Government securities are investment products that the central and state governments of a country issue. They can be in the form of bonds, notes, or treasury bills. These securities carry minimal risk and are considered one of the safest investment options.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
