“Monetary weapon of last resort” (Kevin Dowd), “a monetary policy declaration of bankruptcy” (Otmar Issing) or “the most powerful, but also most dangerous monetary instrument” (Pictet) are only some of the statements that result from discussions about helicopter money. However, the former president of the European Central Bank (ECB), Mario Draghi once called helicopter money “an interesting concept” and the president of the German Institute for Economic Research, Marcel Fratzscher stated “helicopter money is feasible and more likely than many can imagine”.
However, what is helicopter money about? The term helicopter money was introduced by the economist Milton Friedman. Friedman said “Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated” [Friedman 1969]. Back then, he introduced the concept for achieving a higher inflation rate. In recent years helicopter money has been seen as a further means of an expansionary monetary policy. It can be used when the interest rates have already hit the zero lower bound as it was the case until recently and traditional monetary policy tools are less effective. In such a scenario, recipients get something for nothing. Friedman calls it “Bonanza from Heaven”.
One may distinguish between helicopter money that directly goes to households and helicopter money that is first transferred to the government.
Helicopter money directly to households
In this original case of helicopter money, a central bank such as the European Central Bank (ECB) prints money that goes directly to the public. The ECB could, for example, open a bank account for each citizen of the euro area and provide it with the set amount of helicopter money. Here, the central bank decides who gets what. Obviously, this may make the central bank more political, as monetary policy makers will directly decide on income levels of households. Politicians, the media, and other interest groups will almost certainly discuss monetary policy issues even more controversially than now. Therefore, a potential risk associated with such a strategy is that central banks will not remain independent in the long run.
The case of helicopter money directly targeted to households has become more relevant recently surrounding the discussion on central bank digital currencies (CBDC). Some versions of CBDCs include opening bank accounts for households directly at the central bank. While it is unlikely that these versions of CBDCs will be adopted (mainly for technical reasons), it clearly tells us that the concept of helicopter money directly to households through central bank accounts is not completely unrealistic.
Helicopter money to government
In a narrow sense, the central bank creates money and transfers it to the government. In a broader sense, a government may finance higher public spending by issuing more debt that will be acquired by the central bank. In both cases, it is the government and not the central bank that decides who gets what. The government has then basically three options of what to do with the money. Firstly, a money financed tax cut is possible. This is an idea of the former Fed governor Ben Bernanke. Secondly, the government can directly transfer money to the citizens. Thirdly, the government can make public investments such as infrastructure projects. This approach has the advantage that elected politicians will decide on the use of helicopter money, reducing direct public pressure on central bank leaders.
In a broad sense, direct financial transfers from the government to households during the pandemic may be described as helicopter money if the central bank had adopted large bond-buying programs at the same time that would effectively finance these higher government expenditures, at least to a large extent. However, one should bear in mind that the financing of government deficits was usually not the formal or main goal of these central bank interventions. The most widely discussed example for such a case is the sequence of three direct transfer payments in the United States during the pandemic.
Benefits and problems of helicopter money
Variants of helicopter money can potentially be implemented fast and may reach households immediately, which makes it a useful tool during a sudden crisis such as the pandemic. Therefore, helicopter money can be expected to result in an increase in aggregate demand in the short-run. Even if households decided not to increase consumption but instead rebalance their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would stimulate the economy by making households wealthier.
However, helicopter money is also associated with large potential risks. Increasing the supply of money has the potential to lead to higher inflation in the future. Why? If a good – in our case money – gets more abundant, it can be expected to become less valuable. And inflation exactly means that the value of money decreases. Therefore, helicopter money repeatedly used would almost certainly lead to higher inflation expectations of households, firms, and financial market participants. Higher inflation expectations in turn imply that the public does not trust the central bank to successfully limit inflation. Thus, a central bank risks becoming less credible in achieving its goal of low inflation.
Conclusion
Helicopter money clearly has the potential to stimulate the economy during a crisis and, perhaps more importantly, to immediately bring financial relief to households in need. However, the associated risks such as higher inflation should not be underestimated. Even if desired during a crisis, it is almost impossible to calibrate the appropriate amount of helicopter money. For instance, the stimulus payments in the United States during the pandemic, which one may very broadly interpret as helicopter money, were probably too large in hindsight and contributed to the currently high inflation rates. Nevertheless, we may see such payments again in the future since they are often an effective tool to immediately help people and the economy during a sudden and large crisis.
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About the Author
Guido Baldi is a member of Reatch and focuses in particular on monetary policy, economic growth, and the future of work. Guido conducts research at the University of Bern and at the German Institute for Economic Research (DIW Berlin).
Maximilian Bisges first studied economics and then business administration in his bachelor's degree at the University of St.Gallen. He is currently studying for a Master's degree in Banking and Finance, also at the University of St.Gallen. He was part of the 2021 cohort of the Scimpact program.
Articles on the Reatch blog reflect the personal opinions of the authors and do not necessarily reflect those of Reatch or its members.
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