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Helicopter Money

Updated on January 29, 2024
Article byJyotsna Suthar
Reviewed byDheeraj Vaidya, CFA, FRM

Helicopter Money Meaning

Helicopter money policy, in economics, refers to a monetary policy that releases substantial sums of money into the economy through various channels. Its primary purpose is to combat deflationary pressures and stimulate the nation’s GDP (Gross Domestic Product).

Helicopter Money

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The concept of helicopter money finds major application in monetary policies. It aims to boost consumer spending among households and savers, increasing demand for goods and services. In doing so, it seeks to address deflationary trends and help stabilize the inflation rate in the economy. However, excessive money circulation can potentially lead to hyperinflation.

Key Takeaways

  • Helicopter money, also known as a helicopter drop, is a government policy involving central banks printing excess money and distributing it to the public.
  • The primary objectives of helicopter money are to combat deflation, boost aggregate demand for goods and services, and stimulate the economy’s GDP.
  • The concept of helicopter money dates back to 1969 when American economist and statistician Milton Friedman first described it in his book “The Optimum Quantity of Money.” In this concept, a metaphorical scenario involves a helicopter flying over a city and dropping money.
  • Unlike helicopter drop, in quantitative easing, central banks buy government bonds to stimulate the money supply. 

How Does Helicopter Money Work?

The helicopter money policy involves the government allowing central banks to create additional money and inject it into the economy to counter deflation. As a result, individuals have more cash on hand, encouraging increased spending. This, in turn, boosts demand, stabilizes economic growth, and is metaphorically known as the “helicopter drop.” For instance, during the Covid-19 pandemic, the United States implemented a form of helicopter money.

Various factors can lead to the implementation of helicopter money, with major triggers being deflation, reduced aggregate demand, and decreased consumer spending. When individuals opt for saving rather than spending, it can disrupt cash circulation within the economy. In response, the government adopts effective monetary policies to counter deflation, but helicopter money becomes a last-resort option if these measures fail.

Two primary methods exist for implementing the Friedman helicopter money policy. Firstly, the government can infuse the economy with additional money by increasing the money supply through various channels, giving consumers more cash for goods and services. This approach simultaneously stimulates demand for goods. The second method involves the central bank distributing funds directly to individuals.

Despite its effectiveness in combating deflation, helicopter money comes with potential consequences. The treasury typically issues bonds to the central bank in exchange for the injected funds. The central bank then deposits the balance with the Treasury, further redistributing it among households and businesses through various programs. However, commercial banks may prefer assets other than additional reserves, prompting them to exchange these reserves for government bonds. As a result, the central bank’s assets and liabilities undergo adjustments.

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Examples

Let us look into a few examples:

Example #1

Consider the 2020 Covid-19 pandemic, where economies pumped cash into their respective nations. Before that, the purpose of helicopter drop was to overcome deflation. However, excess printing became necessary in the later stages of the global crisis. The households and businesses had no access to funds. Thus, the federal government injected cash into the economy through the Coronavirus Aid, Relief, and Economic Security Act (CARES) program. As a result, everyone could access money. In contrast, banks can invest these reserves in government bonds as a part of the investment

However, excess printing led to a high inflation rate. Therefore, the federal government tends to increase interest rates to curb this phase. On the contrary, people will withdraw their money instead of holding it. So, if banks have invested in bonds, it can lead to a financial crisis

Example #2

Japan is one of the notable countries that have used a form of helicopter money. In response to economic stagnation and deflation, the Bank of Japan introduced policies involving direct cash distributions to citizens. This approach aimed to stimulate consumer spending and combat deflationary pressures. Similar to other instances of helicopter money, Japan’s experiment had both positive and potentially concerning outcomes.

Pros And Cons

Let us look into the pros and cons of helicopter money:

Pros of Helicopter Money:

  • It can combat deflationary pressures by injecting additional funds into the economy. This encourages spending, boosts demand for goods and services, and helps stabilize prices.
  • One advantage is that the government can implement it without borrowing funds from external sources. It can independently create and inject money into the economy, which can be beneficial in certain circumstances.
  • This strategy has the potential to enhance the GDP of the economy by stimulating economic activity and encouraging consumer spending.
  • When helicopter money is implemented, there is no immediate need to accumulate additional government debt, as the funds are injected directly into the economy.
  • By providing individuals with additional cash, helicopter money increases the purchasing power of consumers. This often leads to higher consumer spending rates, driving economic growth.

Cons of Helicopter Money:

  • Once helicopter money is distributed, it cannot be easily reversed. This lack of reversibility can be a concern if the policy has unintended consequences or if economic conditions change.
  • Excessive distribution or printing of money can result in hyperinflation, where prices skyrocket, and the currency’s value rapidly declines. This poses a significant risk to the stability of the economy.
  • High levels of money creation can lead to currency depreciation, potentially causing the devaluation of the national currency. This can negatively impact international trade and the purchasing power of citizens.

Helicopter Money vs Quantitative Easing

Although helicopter money and quantitative easing target economic growth and involve central banks, they have distinct features. So, let us look at their differences:

BasisHelicopter MoneyQuantitative Easing
Meaning It refers to an economic concept that directs governments to print excess money in the economy. Quantitative easing is a strategy where central banks buy government bonds to stimulate the money supply. 
Purpose To curb deflation by supplying money to households and consumers. Plus, it increases their purchasing power. Its prime purpose is to lower interest rates so citizens can avail of credit. 
Reversibility option Here, decisions, once taken, cannot be reversed as printing cannot be undone. Central banks can reverse their decision. 
Origin Milton Friedman in 1969Bank of Japan in 2001
ProcessThis policy targets consumers and households by printing excess cash. And then distributed through deposits in their bank accounts. There is no need to repay it. Here, central banks usually buy bonds from the government so that the bank reserves increase. As a result, commercial banks can later lend money to the public.  
Occurrence Deflation Economic recession or stagnation

Frequently Asked Questions (FAQs)

1. What are the risks of helicopter money? 

Helicopter money carries several risks. One significant concern is the potential for inflation if the injected money leads to excessive demand without a corresponding increase in the supply of goods and services. It can also lead to currency devaluation and, in extreme cases, hyperinflation. Additionally, the lack of reversibility once money is distributed can be problematic if economic conditions change.

2. What are the key differences between helicopter money and traditional fiscal policies?

Helicopter money is a monetary policy tool involving central banks, while fiscal policies involve government spending and taxation. Helicopter money is typically aimed at directly increasing money supply and consumer spending, while fiscal policies encompass a wider range of government actions.

3. Is the helicopter money strategy always successful?

Helicopter money is not guaranteed to be a universally successful strategy. Its effectiveness depends on various factors, including the economic context, the magnitude of the cash injection, and how it aligns with broader monetary policies. While it can provide immediate relief and stimulate spending during crises, risks, such as inflation and currency devaluation, must be carefully managed to ensure its success.

This article has been a guide to Helicopter Money and its meaning. We explain its examples, comparison with quantitative easing, pros, and cons. You may also find some useful articles here –

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