Helicopter money is a proposed unconventional monetary policy, sometimes suggested as an alternative to quantitative easing (QE) when the economy is in a liquidity trap (when interest rates near zero and the economy remains in recession). 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. A second set of policies, closer to the original description of helicopter money, and more innovative in the context of monetary history, involves the central bank making direct transfers to the private sector financed with base money, without the direct involvement of fiscal authorities. This has also been called a citizens' dividend or a distribution of future seigniorage.
The phrase "helicopter money" was first coined by Milton Friedman in 1969, when he wrote a parable of dropping money from a helicopter to illustrate the effects of monetary expansion. The concept was revived by economists as a monetary policy proposal in the early 2000s following Japan's Lost Decade. In November 2002, Ben Bernanke, then Federal Reserve Board governor, and later chairman suggested that helicopter money could always be used to prevent deflation.
- 1 Origins
- 2 Policy response to the global financial crisis
- 3 Implementation
- 4 Controversies
- 5 Supporters
- 6 Critics
- 7 In the Eurozone
- 8 In Japan
- 9 Popular Culture
- 10 See also
- 11 References
- 12 Sources
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. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.
Originally used by Friedman to illustrate the effects of monetary policy on inflation and the costs of holding money, rather than an actual policy proposal, the concept has since then been increasingly discussed by economists as a serious alternative to monetary policy instruments such as quantitative easing. 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'.
Friedman himself refers to financing transfer payments with base money as evidence that monetary policy still has power when conventional policies have failed, in his discussion of the Pigou effect, in his 1968 AER Presidential address. Specifically, Friedman argues that "[the] revival of belief in the potency of money policy ... was strongly fostered among economists by the theoretical developments initiated by Haberler but named for Pigou that pointed out a channel – namely changes in wealth – whereby changes in the real quantity of money can affect aggregate demand even if they do not alter interest rates." Friedman is clear that money must be produced "in other ways" than open-market operations, which – like QE – involve "simply substituting money for other assets without changing total wealth." Friedman references a paper by Gottfried Haberler written in 1952, where Haberler says, "Suppose the quantity of money is increased by tax reductions or government transfer payments, and the resulting deficit is financed by borrowing from the central bank or simply printing money".
It is noteworthy in light of more recent debates over the separation between monetary and fiscal policy, that Friedman viewed these policies as evidence of the potency of monetary policy. In the same AER address, he is highly critical of the timeliness and efficacy of fiscal measures to stabilize demand.
The idea of helicopter drops was revived as a serious policy proposal in the early 2000s by economists considering the lessons from Japan. Ben Bernanke famously delivered a speech on preventing deflation in November 2002 as a Federal Reserve Board governor, where he says 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." In that speech, Bernanke himself says, "a money-financed tax cut is essentially equivalent to Milton Friedman's famous 'helicopter drop' of money." In a footnote to that speech, Bernanke also references an important paper by Gauti Eggertson which emphasizes the importance of a commitment from the central bank to keep the money supply at a higher level in the future. The Irish economist, Eric Lonergan, also argued in 2002 in the Financial Times, that central banks consider cash transfers to households as an alternative to further reductions in interest rates, also on the grounds of financial stability. In 2003, Willem Buiter, then chief economist at the European Bank for Reconstruction and Development, revived the concept of helicopter money in a theoretical paper, arguing that base money is not a liability, which provides a more rigorous case for Friedman and Haberler's Pigouvian intuitions.
Policy response to the global financial crisis
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. From around 2012 onwards, some economists began advocating variants of helicopter drops, including 'QE for the people', and a 'debt jubilee' financed with the monetary base. 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. In 2013, the chairman of the UK's Financial Services Authority (FCA), Adair Turner, who had been considered a serious candidate to succeed Mervyn King as Governor of the Bank of England, argued that deficit monetization is the fastest way to recover from the financial crisis in a speech.
Although the original definition of helicopter money describes a situation where central banks distribute cash directly to individuals, more modern use of the term refer to other possibilities, such as granting a universal tax rebate to all households, financed by the central bank. This is for example what Australia did in 2009 or the United States with the Economic Stimulus Act of 2008. The use of tax rebates explains why some consider helicopter money as a fiscal stimulus as opposed to a monetary policy tool. Helicopter money, however, is not meant to be permanent, and is therefore a different policy option than universal basic income.
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. In 2016, the European Central Bank (ECB) launched a TLTRO programme lending money to banks at negative interest rates, which amounts to a transfer to banks. Also, the use of differential interest rates on tiered reserves to support commercial banks' profitability in the face of negative interest rates, opens up another source of helicopter drop - albeit intermediated by banks.
In the case of the Eurozone, the use of TLTROs is believed by some economists to provide a legal and administratively tractable means of introducing transfers to households. 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. The loans could be administered by eligible commercial banks, and under certain conditions the loans would be net interest income positive to the central bank. This idea was revived in 2019 by Frances Coppola, in her book, The Case for People’s Quantitative Easing, and also by researchers at Blackrock, including Stanley Fischer, and also by the French economist Jean Pisani-Ferry.
Many economists would argue that helicopter money, in the form of cash transfers to households, should not be seen as a substitute for fiscal policy. 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. From this perspective, helicopter money is really an insurance policy against the failure of fiscal policy for political, legal or institutional reasons.
Differences from quantitative easing
Like all expansionary monetary policies in general, quantitative easing (QE) and helicopter money involves money creation by central banks to expand the money supply. However, the effect on the central bank's balance sheet of helicopter money is different than with QE. Under QE, central banks create reserves by purchasing bonds or other financial assets, conducting an 'asset swap'. The swap is reversible. By contrast, with helicopter money, central banks give away the money created, without increasing assets on their balance sheet.
Economists argue that the effect on expectations is different because helicopter money created would be perceived as 'permanent' – that is, more irreversible than QE. Economists have pointed out that the effect is not different from a combination of expansionary fiscal policy and expansionary monetary policy conducted at the same time.
Implications for central bank balance sheets
One of the main concerns with transfers from the central bank directly to the private sector is that in contrast to conventional open-market operations the central bank does not have an asset corresponding to the base money created. This has implications for the measured equity of the central bank because base money is typically treated as a liability, but it could also constrain the central bank's ability to set interest rates in the future. The accounting treatment of central banks' balance sheets is controversial. Most economists now recognize that the 'capital' of the central bank is not really important. What matters is can the expansion of base money be reversed in the future, or are their other means to raise interest rates. Various options have been proposed. Oxford professor, Simon Wren-Lewis has suggested that the government pre-commit to providing the Bank of England with bonds if needed. The European Central Bank can, in fact, mandate an increase in its capital, and the introduction of tiered reserves and interest on reserves gives central banks an array of tools to protect their own net income and the demand for reserves.
Former chairman of the Federal Reserve Ben Bernanke is known to be one of the proponents of helicopter money when he gave a speech in November 2002 arguing, in the case of Japan, that "a money-financed tax cut is essentially equivalent to Milton Friedman's famous 'helicopter drop' of money." In April 2016, Ben Bernanke wrote a blog post arguing that "such programs may be the best available alternative. It would be premature to rule them out." Fed chairwoman Janet Yellen also admitted that helicopter money could be an option in "extreme situations".
Citigroup Chief Economist Willem Buiter is also known to be a prominent advocate of the concept. Other proponents include Financial Times' Chief Commentator Martin Wolf, Oxford economists John Muellbauer, and Simon Wren-Lewis, Economist Steve Keen, the political economist Mark Blyth of Brown University, Berkeley economics professor and former Treasury advisor, Brad DeLong, UCLA economics professor, Roger Farmer, American macro hedge fund manager Ray Dalio, Irish economist and Fund manager Eric Lonergan, Anatole Kaletsky, Romain Baeriswyl,Martin Sandbu, Jean Pisani-Ferry.
The idea also finds support among central bankers. For example, former governor of the Irish central bank Patrick Honohan said he believes the policy would work while the ECB's chief economist Peter Praet once said "All central banks can do it". The Vice-Governor of the Czech Central Bank Mojmír Hampl published a paper in which he writes that "the idea offers many virtues and advantages compared to other forms of unconventional monetary policy, especially obliterating the need to rely on a complicated transmission mechanism, allowing much easier communication to the public, and boosting consumer confidence when most needed."
Consequently, a range of concerns include the fact that helicopter money would undermine trust in the currency (which ultimately would lead to hyperinflation). This concern was particularly voiced by German Economist (and former Chief Economist at the ECB) Otmar Issing in a paper written in 2014. Later in 2016, he declared in an interview: "I think the whole idea of the helicopter money is downright devastating. For this is nothing more than a declaration of bankruptcy of the monetary policy" Richard Koo makes a similar argument when saying "if such envelopes arrived day after day, the entire country would quickly fall into a panic as people lose all sense of what their currency is worth."
This clashes with the argument that people would not spend much of the money they receive (and therefore helicopter money cannot be inflationary).
Would helicopter money be spent?
Several prominent economist such as central banker Raghuram Rajan are against helicopter money on the grounds that helicopter money would be ineffective because people would not spend the money. In response, Lord Adair Turner argues: "Money financed deficits will always stimulate nominal demand. By comparison debt finance deficits might do so, but might not."
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.
"There is no such thing as a free lunch"
Another range of critics involve the idea that there cannot be such thing as "free money" or as economists say "there is no such thing as a free lunch". This criticism was notably expressed by Bank for International Settlements researchers Claudio Borio, Piti Disyatat, Anna Zabai., who claimed that helicopter drops to citizens would necessarily involve for the central bank to pay interests on the extra reserves being supplied.
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."
Other critics claim helicopter money would be outside of the mandate of central banks, because it would "blur the lines between fiscal policy and monetary policy" mainly because helicopter money would involve 'fiscal effects' which is traditionally the role of governments to decide on. 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.
The European Central Bank explained, in a letter to MEP Jonás Fernández, that "legal complexities could still arise if the scheme could be seen as the ECB financing an obligation of the public sector vis-à-vis third parties, as this would also violate the prohibition of monetary financing". However this refers to a very unlikely and undesirable case where helicopter money payments by the central bank would substitute to welfare payments (which are a liability of governments).
Bundesbank president Jens Weidmann also voiced opposition against helicopter money, arguing it would "tear gaping holes in central bank balance sheets. Ultimately, it would be down to the euro-area countries, and thus the taxpayer, to shoulder the costs because central banks would be unprofitable for quite some time." The National bank of Belgium also released a paper making a similar argument.
Threat against central bank independence
This section is empty. You can help by adding to it. (December 2018)
In the Eurozone
On March 10, 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'. This statement was followed by another statement from the ECB's Peter Praet who declared:
"Yes, all central banks can do it. You can issue currency and you distribute it to people. That’s helicopter money. Helicopter money is giving to the people part of the net present value of your future seigniorage, the profit you make on the future banknotes. 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 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. The campaign is currently supported by 20 organisations across Europe and more than 116 economists.
On June 17, 2016, 18 Members of the European Parliament (including Philippe Lamberts, Paul Tang and Fabio De Masi) signed an open letter 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." If it doesn't consider alternatives to QE, MEPs fear the ECB would leave itself “unprepared for a deterioration in economic conditions."
In October 2016, a survey showed that 54% Europeans think helicopter money would be a good idea, with only 14% against.
In a meeting with Japanese Prime Minister Shinzo Abe and Bank of Japan's Haruhiko Kuroda in July 2016 it was widely reported that former Federal Reserve chairman Ben Bernanke advised the policy of monetizing more government debt created to fund infrastructure projects, ostensibly as a way to drop "Helicopter Money" on Japan to stimulate the economy and halt deflation in Japan. Financial markets began to front-run this stimulus effort days before it was announced when accounts of Bernanke's visit to Japan were first reported.
Later in the month the Bank of Japan 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.
- "Worthwhile Canadian Initiative". Retrieved 5 May 2016.
- Blyth, Mark; Lonergan, Eric; Wren-Lewis, Simon (21 May 2015). "Now the Bank of England needs to deliver QE for the people". The Guardian – via www.theguardian.com.
- Dylan Matthews (15 May 2015). "To fix the economy, let's print money and mail it to everyone". Vox. Retrieved 5 May 2016.
- "Interview with Peter Praet, Member of the Executive Board of the ECB, conducted by Ferdinando Giugliano and Tonia Mastrobuoni on 15 March 2016 and published on 18 March 2016".
Helicopter money is giving to the people part of the net present value of your future seigniorage, the profit you make on the future banknotes.
- Milton Friedman (March 1968). "The Role of Monetary Policy" (PDF). American Economic Review. 58 (1): 1–17. Archived from the original (PDF) on 5 June 2016.
- Haberler, Gottfried (1 January 1952). "The Pigou Effect Once More". Journal of Political Economy. 60 (3): 240–246. doi:10.1086/257211. JSTOR 1826454.
- "Speech, Bernanke --Deflation-- November 21, 2002". Retrieved 5 May 2016.
- Gauti B. Eggertsson (1 March 2003). "How to Fight Deflation in a Liquidity Trap: Committing to Being Irresponsible" (PDF). IMF (Working Paper).
- Beyond interest rates, Financial Times, Sep 09, 2002
- Willem H. Buiter (6 November 2003). "Helicopter Money Irredeemable fiat money and the liquidity trap Or: is money net wealth after all?" (PDF).
- "How about quantitative easing for the people?". Reuters. August 2012. Retrieved 5 May 2016.
- "Combatting Eurozone deflation: QE for the people". 23 December 2014. Retrieved 5 May 2016.
- "Helicopter Ben confronts the challenge of a lifetime, Financial Times, 16 December 2008".
Central banks may soon resort to their most powerful weapons against deflation: the printing press and the "helicopter drop" of money.
- "Central banks need a helicopter, Financial Times, 4 December 2008".
The most direct and efficient solution to the economic and financial problems is for central banks to transfer cash directly to the household sector.
- "Debt, Money, and Mephistopheles: How do we get out of this mess? - Speech". Retrieved 5 May 2016.
- Andrew Leigh (2012). "How Much Did the 2009 Australian Fiscal Stimulus Boost Demand? Evidence from Household-Reported Spending Effects" (PDF). The B.E. Journal of Macroeconomics. 12 (1): 1–24. doi:10.1515/1935-1690.2035.
- "Helicopter money and basic income: friends or foes? | Basic Income News". Basic Income News. 25 March 2017. Retrieved 10 April 2017.
- Mehreen Khan (19 March 2016). "Central banks are already doing the unthinkable - you just don't know it". The Telegraph. Retrieved 5 May 2016.
- "Free lunch: Helicopter engineering, published on 16 February 29 2016".
Central banks have ways to drop money into ailing economies.
- Hüttl, Pia; Alvaro Leandro (14 March 2016). "Helicopter drops reloaded". breugel.org. Retrieved 5 May 2016.
- "Legal helicopter drops in the Eurozone, published on February 24 2016".
- Mainly Macro (March 2016). "mainly macro". Retrieved 5 May 2016.
- "Governments can borrow without increasing their debt". Financial Times. Retrieved 5 May 2016.
- Ulrich Bindseil; Andres Manzanares; Benedict Weller (September 2004). "The Role of Central Bank Capital Revisited" (PDF). European Central Bank. ISSN 1725-2806.
- Eric Lonergan. "Does the central bank's balance sheet matter?". Philosophy of Money. Retrieved 5 May 2016.
- "Speech, Bernanke --Deflation-- November 21, 2002". Retrieved 5 May 2016.
- Ben S. Bernanke (11 April 2016). "What tools does the Fed have left? Part 3: Helicopter money". The Brookings Institution. Retrieved 5 May 2016.
- Gillespie, Patrick. "Janet Yellen: Helicopter money is an option in extreme situations". CNNMoney. Retrieved 17 November 2017.
- SPIEGEL ONLINE, Hamburg, Germany (6 January 2015). "Economists Say Handing Out Cash Could Help Euro Zone Economy". SPIEGEL ONLINE. Retrieved 5 May 2016.
- "The case for helicopter money". Financial Times. Retrieved 5 May 2016.
- J. Bradford DeLong. "Rescue Helicopters for Stranded Economies". Project Syndicate. Retrieved 5 May 2016.
- "Helicopter Money: When Zero Just Isn't Low Enough". Milken Institute Review. Retrieved 11 February 2017.
- Why the ECB should give money directly to People (Eric Lonergan). 8 April 2016. Retrieved 5 May 2016 – via YouTube.
- Kaletsky, Anatole (6 May 2016). "Central Banking's Final Frontier? by Anatole Kaletsky - Project Syndicate".
- Baeriswyl, Romain (2017). "The Case for the Separation of Money and Credit". Monetary Policy, Financial Crises, and the Macroeconomy. Springer, Cham. pp. 105–121. doi:10.1007/978-3-319-56261-2_6. ISBN 9783319562605.
- Sandbu, Martin (2016). "Helicopter money: if not now, then when?". Financial Times.
- Pisani-Ferry, Jean (30 September 2019). "How to Ward Off the Next Recession | by Jean Pisani-Ferry". Project Syndicate. Retrieved 12 October 2019.
- Mojmir, Hampl; Tomas, Havranek (2018). "Central Bank Capital as an Instrument of Monetary Policy". Cite journal requires
- "Bill Gross Investment Outlook May 2016". Retrieved 5 May 2016.
- Paul Vigna. "Bill Gross: What to Do After the Robots Take Our Jobs". WSJ. Retrieved 5 May 2016.
- Stanley Fischer, Elga Bartsch, Jean Boivin, Stanley Fischer, Philipp Hildebrand (August 2019). "Dealing with the next downturn: From unconventional monetary policy to unprecedented policy coordination" (PDF). Blackrock Institute.CS1 maint: multiple names: authors list (link)
- Otmar Issing (7 February 2015). "Die letzte Waffe – Helicopter Money?" (PDF) (Press Article). SAFE.
- Frankfurter Allgemeine Zeitung GmbH (23 March 2016). "Ex-EZB-Chefvolkswirt Otmar Issing warnt vor "Helikoptergeld"". FAZ.NET. Retrieved 5 May 2016.
- Izabella Kaminska (27 July 2016). "Koo on why helicopter money just won't work". FT Alphaville.
- Cassidy, John (13 May 2016). "Raghuram Rajan and the Dangers of Helicopter Money" – via www.newyorker.com.
- "Why a future tax on bank credit intermediation does not offset the stimulative effect of money finance deficits". Institute for New Economic Thinking.
- Helicopter Money – Let It Rain?, Astellon Capital, June 2016
- eZonomics, ING. "Helicopter Money 2016". eZonomics by ING. Retrieved 11 February 2017.
- Djuric, Uros; Neugart, Michael (17 December 2016). "Helicopter Money: Survey Evidence on Expectation Formation and Consumption Behavior". Rochester, NY. SSRN 2893008. Cite journal requires
- Maarten van Rooij; Jakob de Haan (2017). "Will helicopter money be spent? New evidence - De Nederlandsche Bank". www.dnb.nl. Retrieved 10 April 2017.
- Borio, Claudio; Disyatat, Piti; Zabai, Anna (24 May 2016). "Helicopter money: The illusion of a free lunch".
- "Why Helicopter Money is a "Free Lunch" - EconoMonitor". www.economonitor.com.
- Bank, European Central. "Interview with Süddeutsche Zeitung". European Central Bank. Retrieved 11 February 2017.
- "Helicopter money and fiscal policy". mainlymacro.blogspot.be. Retrieved 11 February 2017.
- "The distinction between monetary and fiscal policy - Philosophy of Money". Philosophy of Money. 3 April 2016. Retrieved 11 February 2017.
- "Letter from ECB President to Jonás Fernández" (PDF). European Central Bank. 29 November 2016.
- "Deutsche Bundesbank - Interviews - "Helicopter money would tear gaping holes in central bank balance sheets"". 21 March 2016. Archived from the original on 18 May 2016. Retrieved 5 May 2016.
- "Helicopter money and debt-financed fiscal stimulus: one and the same thing? | nbb.be". www.nbb.be. Retrieved 11 February 2017.
- Mario Draghi: 'Helicopter money is a very interesting concept'. 10 March 2016. Retrieved 5 May 2016 – via YouTube.
- European Central Bank. "Interview with La Repubblica". European Central Bank. Retrieved 5 May 2016.
- "Cookiewall - Het Financieele Dagblad". fd.nl.
- "QE for People • A Rescue Plan for the Eurozone". Quantitative Easing for People. Retrieved 5 May 2016.
- "MEPs want the ECB to look at helicopter money".
- "Subscribe to read". Financial Times.
- "54% of Europeans are in favour of 'helicopter money'". Quantitative Easing for People. Retrieved 15 October 2016.
- Can 'Helicopter Ben Bernanke' Save Japan?, Retrieved July 28, 2016.
- Enda Curran, Toru Fujioka (27 July 2016). "Abe's Unusual Stimulus Unveiling May Be Directed at the BOJ". Bloomberg. Retrieved 28 July 2016.
- Stanley White (31 July 2016). "'Helicopter money' talk takes flight as Bank of Japan runs out of runway". The Japan Times. Reuters. Retrieved 1 August 2016.
- Nanowar of Steel Tooth Fairy - Youtube video
- Helicopter money: A cure for what ails the euro area?, European Parliamentary Research Service, April 2016
- Helicopter Money: Why it works - Always, Willem Buiter, 2014
- Helicopter Money reloaded, Bruegel, 2016
- Recovery in the Eurozone: using money creation to Stimulate the economy, Frank van Lerven, 2015
- What do people mean by helicopter money?, Simon Wren-Lewis, 2012
- From Zirp, Nirp, QE, and helicopter money to a better monetary system, Thomas Mayer, 2016
- Citizens' Monetary Dividend – Upgrading the ECB's Toolkit, Stan Jourdan and Eric Lonergan, 2016