What is Helicopter Money and how it is different from Quantitative Easing (QE)?

The Economic Survey 2017 mention the concept of helicopter money as a monetary stimulus policy (conceptualized in the developed world). Like Quantitative Easing, Helicopter Money is a tactics with the central bank for stimulating the economy.

Origin of the concept

The idea of Helicopter Money was introduced by the Father of Monetarism -Milton Friedman in 1969. Monetarism is a school of thought in Economics which originated at Chicago University, postulating that monetary policy is the all-important policy in an economy. The concept of Helicopter Money was contained in Friedman’s famous paper “The Optimum Quantity of Money”.

What is Helicopter Money?

The underlying principle of Helicopter Money is that if a central bank wants to raise inflation and output (economic growth) in an economy from a low level, the best way is to give everyone direct money transfers. Here, provision of money into the public is like throwing money from a helicopter. People would see that such a money transfer is a one-off type expansion of the amount of money in circulation. Hence, they will spend it freely and quickly; resulting in increased demand, spending, consumption, investment, employment growth etc.

Inflation is also brought back (raised) to the central banks comfort zone or target figure. Remember that inflation will be quite low initially because of poor demand and economic growth. Low inflation is an indicator of poor economic growth in a developed economy.

At the practical level, helicopter money gives an idea that direct money infusion into the public can effectively raise demand. But at the same time, implementing it need modifications and improvements. Several variations of the concept were developed in later period while executing it.

For example, Ben Bernanke-academician and former Chairman of the US Federal Reserve raised the possibility for monetary-financed tax cuts. Here, a government cut taxes in a recession while the central bank committing to purchase government debt issued to meet its expenditure (as a tax cut government has only low revenue). Tax cut makes more money with the people and they may spend it. On the other side, central bank gives money to the government as it purchases government bonds. Overall, spending in the economy goes up.

Difference between Helicopter money and QE

Quantitative Easing is another type of monetary stimulus launched by the Federal Reserve after the financial crisis. Under QE, the central bank makes large-scale purchases of assets or bonds from financial markets by supplying money into the banking system. As a result, rate of interest comes down and this stimulates lending by banks, consumption, investment and economic growth. The working of QE is through the banking system whereas Helicopter money works directly by stimulating demand from the people.