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What s Helicopter Money?
Reserve Bank of India Governor Raghuram Rajan doubts that ‘helicopter money’ free cash given directly to citizens to stimulate growth would be successful if adopted by developed world policymakers.
Reserve Bank of India Governor Raghuram Rajan doubts that ‘helicopter money’ free cash given directly to citizens to stimulate growth would be successful if adopted by developed world policymakers. Euro zone and Japanese interest rates in negative territory have done little to help growth or inflation, causing some bankers and finance officials to speculate that policymakers will deploy ‘helicopter money’ even though economists say it would be a last resort.
Widely credited with predicting the global financial crisis of 2008-2009, Rajan said the effectiveness of helicopter money was far from proven. He said at the London School of Economics, “I am throwing the possibility out there that even helicopter money may not work for the same reason that so much fiscal spending has not elevated growth”.
Helicopter money is a reference to an idea made popular by the American economist Milton Friedman in 1969. In the now famous paper “The Optimum Quantity of Money”, Friedman 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.”
The basic principle is that if a central bank wants to raise inflation and output in an economy that is running substantially below potential, one of the most effective tools would be simply to give everyone direct money transfers. In theory, people would see this as a permanent one-off expansion of the amount of money in circulation and would then start to spend more freely, increasing broader economic activity and pushing inflation back up to the central bank’s target. From that paper, former Federal Reserve Chair BenBernanke developed the theory further. Bernanke raised the possibility for monetary-financed tax cuts, whereby a government could cut taxes in a slump with the central bank committing to purchasing its debt.
