Helicopter money
Although the original idea of helicopter money describes central banks making payments directly to individuals, economists have used the term "helicopter money" to refer to a wide range of different policy ideas, including the "permanent" monetization of budget deficits – with the additional element of attempting to shock beliefs about future inflation or nominal GDP growth, in order to change expectations.
This question is again relevant due to the negative side effects of low interest rate policies as well as the development of central bank digital currency.
Although very similar concepts have been previously defended by various people including Major Douglas and the Social Credit Movement, Nobel winning economist Milton Friedman is known to be the one who coined the term 'helicopter money' in the now famous paper "The Optimum Quantity of Money" (1969), where he included the following parable: 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.
According to its proponents, helicopter money would be a more efficient way to increase aggregate demand, especially in a situation of liquidity trap, when central banks have reached the so-called "zero lower bound".
Ben Bernanke famously delivered a speech on preventing deflation in November 2002 as a Federal Reserve Board governor, where he said that Keynes "once semi-seriously proposed, as an anti-deflationary measure, that the government fill bottles with currency and bury them in mine shafts to be dug up by the public".
[10] In December 2008, Eric Lonergan and Martin Wolf suggested in the Financial Times that central banks make cash transfers directly to households, financed with base money, to combat the threat of global deflation.
[11][12] From around 2012 onwards, some other economists began advocating variants of helicopter drops, including "QE for the people" and a "debt jubilee" financed with the monetary base.
[13][14] These proposals reflected a sense that conventional policies, including QE, were failing or having many adverse effects – on either financial stability or the distribution of wealth and income.
[16] Under a strict definition, where helicopter drops are simply transfers from the central bank to the private sector financed with base money a number of economists have argued that they are already occurring.
[23] The economist, Eric Lonergan, argued in 2016 that legal helicopter drops in the Eurozone could be structured via zero coupon, perpetual loans, which all European adult citizens would be eligible to receive.
[40][41] On 10 March 2016, the idea became increasingly popular in Europe after Mario Draghi the President of the European Central Bank, said in a press conference that he found the concept "very interesting".
The question is, if and when is it opportune to make recourse to that sort of instrument which is really an extreme sort of instrument.In 2015, a European campaign called "Quantitative Easing for People" was launched[43] and is effectively promoting the concept of Helicopter Money, along with other proposals for "Green QE" and "Strategic QE", which are other types of monetary financing operations by central banks involving public investment programmes.
[44] On 17 June 2016, 18 Members of the European Parliament (including Philippe Lamberts, Paul Tang and Fabio De Masi) signed an open letter[45] calling on the ECB to "provide evidence-based analysis of the potential effects of the alternative proposals mentioned above, and to clarify under which conditions their implementation would be legal".
[51][52] In 2020, the US legislative system debated issuing two times a $1,000 check to each eligible adult citizen, described by media as "helicopter money", as a response to the US coronavirus pandemic.
[57] Later in the month the Bank of Japan in an ongoing review of its monetary stimulus program was reported to be considering policies somewhat similar to "helicopter money", such as selling 50-year or perpetual bonds.
[citation needed] Comedy heavy metal band Nanowar of Steel cited the helicopter drop monetary policy in their financial-epic-metal song "Tooth Fairy".
Given the government's borrowing costs are extremely low at close to zero interest rates, conventional fiscal stimulus through tax cuts and infrastructure spending should work.
[citation needed] Consequently, a range of concerns include the fact that helicopter money would undermine trust in the currency (which ultimately would lead to hyperinflation).
A study published by the French Economic Advisory Council estimates that 1% of GDP equivalent of helicopter money transfers in the Eurozone would generate around 0.5% of inflation over one year.
"[68] Contradicting this argument, several surveys conducted in the Eurozone concluded however that between 30 and 55% of the distributed money would be spent by households, in effect resulting in a boost of around 2% of GDP.
[74] In a response, the former IMF economist Biagio Bossone challenges the later assumption and argues that "helicopter money is a 'free lunch' in the simple sense that, if it works and succeeds in closing the output gap, people won’t have to repay it through higher taxes or undesired (above optimal) inflation".
However advocates of helicopter money such as Eric Lonergan and Simon Wren-Lewis invalidate this argument by observing that standard monetary policy tools also have fiscal effects.
For this reason, Bundesbank president Jens Weidmann also voiced opposition against helicopter money, arguing it would "tear gaping holes in central bank balance sheets.
[86][87] Endra Curren and Ben Holland of Bloomberg stated "That type of stimulus [helicopter money] used to be taboo, in part because it risks eroding the independence from politics that monetary policy makers prize [...] History is littered with cautionary tales in which blurring the lines between central bank and Treasury coffers led to runaway inflation.
