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Imagine a helicopter flying over a city and it drops a considerable sum of money onto the ground. The people of the city would run helter-skelter to pick up as much money as they can get their hands on. The question then arises, what will the people of this particular city do with this excess money? The answer in all probability is that they will spend the money, which in turn will give a significant boost to the economy and stoke inflation. This forms the basis of the helicopter money theory as an instrument to kickstart the economy that gained a lot of traction during the earlier days of the pandemic.

Helicopter money is an unconventional monetary policy tool which involves the central bank printing large sums of money and distributing it among the general public. It would thus expand the money supply in the economy. It is essentially used as a last resort to stimulate the economy during a recession or during a period of a general slump in the economy and when interest rates are hovering near zero.

The term ‘Helicopter Money’ was first coined by the American economist Milton Friedman in 1969, in his now famous paper “The Optimum Quantity of Money”. In this he envisaged a helicopter dropping paper money over a community as a kind of experiment to illustrate what a once in a lifetime expansion in money supply would do to saving and spending in the economy. The idea gained prominence in 2002, when Ben Bernanke referred to it while arguing that the central bank of a country could always stoke inflation in an economy when required.

Helicopter money has often been confused with quantitative easing undertaken by the central bank. Though helicopter drop and quantitative easing both are monetary policy tools that result in expansion of the money supply in the economy, enhanced consumer spending and increased inflation, the impact on the balance sheet of the central bank undertaking any of the above-mentioned monetary policy measures is quite different. Quantitative easing involves the central bank purchasing long term securities like government and corporate bonds from the open market.

QE involves the issue of money by the Central Bank to purchase assets with a financial nature and it thus provides support to the banking system. It also plays a pivotal role in reducing interest rates. The payments are typically made to the financial institutions and not to the general public. While in the case of helicopter money the payments are made to the public and finance specific projects like infrastructure. Unlike QE, the intent is not to support the banking system or reduce interest rates.

It has often been said that helicopter money is free. It is free for the recipients as they get something by paying next to nothing. However, to say that helicopter money is absolutely free would mean that a valuable asset can be conjured out of thin air with absolutely nothing and that it has no opportunity cost. This isn’t the case as the profits which would have accrued from the issue of money by the Central Bank is the lost opportunity cost. When the Central Bank engages in this operation it acquires a notional asset because issuing money would involve an increase in liabilities and to balance both sides of the equation, it would be followed by an increase in the asset side by the same amount. That’s where the notional asset comes into play, it has a book value equal to the exact issue of money in the helicopter money operation and a market value equal to zero. Consider it this way, the Central Bank could have acquired a bond that involved future payments by issuing the same amount of money but here, there are no future payments involved. Thus, helicopter money has an opportunity cost and is not what it is portrayed to be.

Utilizing this unconventional monetary policy tool to stimulate aggregate demand and inflation in the economy is not bereft of risks. For starters, there is no guarantee that the consumers, the beneficiaries of the helicopter drop would spend the money. They may even decide to save the money or pay off their existing debts. Thus, the primary objective is not fulfilled as there would be no significant demand boost. Since helicopter money involves an increase in the money supply in the economy, concerns regarding inflation and hyperinflation cannot be ignored, as it happened in Zimbabwe and there is no assurance that it won’t happen elsewhere. Printing money on such a large scale can gravely affect the confidence in the currency and it might be at risk of depreciation in the foreign exchange market. Even though modern monetary theorists might believe that an increase in money supply and printing loads of money has no effect on the currency of a nation, the real-world experience suggests otherwise.

Therefore, a Central Bank should be cognisant of the risks and potential downsides that helicopter money presents. It should give the green signal to helicopter money only afterdue diligence has been conducted and the costs and benefits taken into account. Policymakers would do well to remember that there is no free lunch in economics, finance, and policymaking. Helicopter money is no silver bullet and must be deployed with caution.

By Aditi Singla


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