What is Helicopter Money?

Also known as the helicopter drop, helicopter money is an unusual and imaginary monetary policy tool that involves printing a large sum of money to distribute among the public to stimulate the Economy.

This one is a metaphorical term that alludes to unconventional measures executed to enhance the economy during the deflationary period. Back in April 2020, Telangana’s CM remarked that helicopter money is a good way to revive the entire economy during the pandemic.

Where did Helicopter Money Originate?

The first person to coin the term 'Helicopter Money' was Milton Friedman – a noted, well-known Economist. But it was in 2002 when this term acquired popularity when the then US Federal Reserve Governor – Ben Bernanke – said it in his speech.

Understanding Helicopter Money

Although the original notion of helicopter drop describes the payments made directly to people, economists use this term for a Range of policy ideas, such as monetisation of budget deficits by keeping changing expectations in mind. Another sequence of policies, similar to the original notion of helicopter money, comprises the central Bank making direct transfers to the private sector that are financed with base money without any direct participation of fiscal authorities.

Helicopter money, sometimes, is also put forth as a substitute for quantitative easing when the economy is in a state of liquidity trap (a situation where the interest rates are going toward zero and Recession is persisting in the economy). According to the advocates of this term, it is an effective way to increase the overall demand, especially in a situation of a liquidity trap when the central bank has touched the mark of Zero Nominal Lower Bound.

Is Helicopter Money Bad?

A lot of investors and economists fear that the helicopter money is much harder to drain from the entire system. Also, the extra money can cause long-term Inflation over a period of time.

Benefits of Helicopter Money

Here are some benefits of helicopter money:

• It does not depend on augmented borrowing to pump the economy, which simply means that it will not create more debt
• It enhances Economic Growth and spending more effectively as compared to quantitative easing, as it intensifies the aggregate demand instantly

Problems with Helicopter Money

Here are some problems with helicopter money:

• It doesn’t comprise repayment liability; thus, a lot of people argue that it is not an appropriate solution to recuperate the economy
• It can cause over-inflation
• It can undervalue the currency in the foreign exchange Market

Difference Between Quantitative Easing and Helicopter Money

A lot of times, quantitative easing has been misconstrued as helicopter money. Although both of them are monetary policy tools that assist with the expansion of the money supply, the effect on the Balance Sheet of the central bank is different. Helicopter money helps increase the supply of money by distributing huge amounts of currency to the public, which does not increase any assets on the balance sheet of the central bank. On the other hand, quantitative easing helps increase the supply by buying government securities or other financial securities from commercial banks and financial institutes to stimulate economic growth.

Criticisms of Helicopter Money

Some of the key criticisms of helicopter money are as follows:

• Helicopter Money Leads to Devaluing of the Domestic Currency

With domestic currency getting printed, its value can decrease substantially. This can result in the discouragement of domestic currency purchases by currency speculators

• It is Irreversible

Considering that money is given directly to consumers, helicopter money is irreversible. It has caused several economists to argue that this concept is not appropriate as a long-term solution to pump-up the economic growth

• Helicopter Money Causes Hyperinflation

Helicopter money can weaken the local currency’s value. This is because consumers may lose the sense of the currency’s worth. Thus, helicopter money can cause hyperinflation