Helicopter Money - Banking Awareness

Banking Awareness: Helicopter Money

In this post, we will discuss the concepts of Helicopter Money and Quantitative easing(QE), and how the two concepts are different from one another.

Introduction to Helicopter Money

Definition: Helicopter Money is an unconventional monetary policy tool under which a large sum of new money is printed and distributed among the public for spending. The objective of this is to stimulate the economy at the time of recession or when interest rates fall to a very low point or to zero. 

Helicopter money describes central banks making payments directly to individuals. It is basically a theoretical concept. 

Objective: The main objective of Helicopter money is to increase the supply of money.

helicopter money

Origin of Helicopter Money

The term was coined by American economist Milton Friedman in 1969. It is also known by the name of Helicopter Drop. It gets its name from the concept that as if emergency supplies are dropped from the helicopter. So it basically denotes helicopter dropping money from the sky.

Helicopter Money vs Quantitative easing (QE)

Quantitative easing– Under Quantitative easing, the Central Bank of any country buys predetermined amounts of government bonds or other financial assets (private sector market participants like banks).

Objective of QE: It is an economic monetary policy with the objective of lowering interest rates and increase the money supply. Hence by doing this, the Central Banks will increase the supply of money in the market and lowering interest rates should encourage banks to lend, and in turn consumers and businesses to spend. 

Hence you will observe that the end purpose of both Helicopter Money and Quantitative easing (QE) is same, i.e increase in the money supply. 

The difference in both these concept is that:

  • Under helicopter money, central banks distribute the money created, without increasing assets on their balance sheet.
  • Under QE, central banks increase the supply of the money by creating reserves by purchasing bonds or other financial assets.

Helicopter Money in News

In April 2020, KC Rao, the chief minister of Telangana said that helicopter money can help states comes out of the economic slowdown created by the coronavirus pandemic. He asked for the release of 5% funds from GDP by way of quantitative easing (QE). Source: Economic Times

Pros and cons of helicopter money

Pros of Helicopter Money

  • It doesn’t create more debt– Since in helicopter money, the central bank/government does not borrow from anywhere hence no debt is created and also interest rates can remain unchanged.
  • It increases aggregate demand immediately– Since people will have money instantly, they can spend it easily. As a result helicopter money boosts spending and economic growth more effectively than as compared t0 quantitative easing.

Cons of helicopter money

  • Helicopter money is not reversible– Unlike quantitative easing, the helicopter money is not reversible. You can understand it, since there is no purchase in Helicopter Money and money is directly given to the public.
  • Central bank cannot use interest rates to recover any costs– Since the money is not linked to a borrowed asset (loan) and instead, the money is given directly to the public, a central bank cannot use interest rates to recover any costs. This may result into over-inflation and may cause damage to the central bank’s financials in the long run.
  • Devaluation of the currency on the foreign exchange market– In Helicopter money, more currency is printed and supply increases. Due to this the value of the domestic currency could significantly decrease.

 

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