Helicopter money has become popular among economists and policy makers as a result of the ineffectiveness of conventional monetary policy in an environment of near zero and negative interest rates. It has become more so after the unconventional Quantitative Easing policy outlived its usefulness and Brexit became a reality. This article defines helicopter money dropping and explains its significance as an unconventional monetary policy in the current economic environment that includes Brexit.
Helicopter Money is a term that represents the act of the Fed creating money to finance fiscal transfers without going through the open market operation. In this case, the government doesn’t need to issue Treasury securities, sell them in the capital markets and add more to government debt. The Fed or the central bank discusses fiscal options (e.g., infrastructure investment, green energy, education spending, etc.) with the government and then supplies the government with the multipliers for those options. Then the government makes a choice out of those options and informs the central bank of the amount of helicopter money that needs to be created. In this case, helicopter money affects aggregate demand without going through the traditional interest rate channel. The mechanism is called the “Pigou effect” or the wealth channel by Milton Friedman who first introduced the helicopter money metaphor.
This accommodating policy definition of helicopter money drop is different from the definition which suggests that the Fed make direct transfers to the private sector financed with the so called base money (assuming it can be reversed in the future) without involving the fiscal policy. This second definition is known as a “citizens’ dividend” or a “distribution of future seigniorage”. The application of their form of helicopter money has happened in Europe in 2016 under the TLTRO lending program, through which the ECB has lent money to banks at negative interest rates, which amounts to a transfer to banks
The advantages are that, firstly the money created and transferred to the government through the helicopter money channel does not add to government debt and secondly it does not crowd out private investment as it does not increase interest rates.
The only requirement is coordination between monetary and fiscal policies as described above.
The disadvantages are that the helicopter money dropping may tear central banks’ balance sheets and make those banks unprofitable for some time in the future. It may lead to hyperinflation; may hinder the Fed’s ability to manage interest rates as a tool for conducting conventional monetary policy; requires a coordination with fiscal policy which is difficult to do; may make the financing of the government debt this way addictive; may make the Fed lose its independence; may not be feasible in a world where central bankers set interest rate to certain targets; and should not be a substitute for conventional fiscal stimulus which can be conducted by tax cuts and infrastructure spending.
Monetary policy has reached its limits after pursuing three Quantitative Easing (QE)’s and one operation swift at a time when interest rates have been close to zero (liquidity trap) and the economy is in a slow growth mode. Thus, helicopter money is proposed as an alternative to QE and could be the most unconventional of all monetary policies. Moreover, fiscal policy is not feasible to increase aggregate demand because of politics in the Congress and the anxiety about the high government debt. Thus, printing money to finance fiscal transfers is appealing now, particularly in the wake of Brexit. Many financial institutes such as Deutsche Bank, Morgan Stanley, Citigroup and others are now considering helicopter money as an alternative monetary policy for Britain after Brexit. For the United States, it is still a thought experiment at this stage but this things may change in the future. Economist Ben Bernanke supports it as a last resort.