What is Helicopter Money?
Whenever an economy faces a situation when interest rates are low and the economy enters recession, central bank resorts to policies to increase money supply. This is done to increase inflation and output in the economy. For this, central bank tries to increase money with the public. It can do it by traditional quantitative easing techniques or people’s quantitative easing technique also known as helicopter money. In traditional quantitative easing, central bank tries to stimulate economy by buying securities from commercial banks. This increases the money supply with public and thus creating inflation. Helicopter money is different from quantitative easing. While Quantitative easing is buying of securities, helicopter money resorts to printing of new currency. In this government is of opinion that if people directly receive the money, they will spend it and increase the inflation. In this commercial banks would be credited with the money in new central bank reserves. Simultaneously, government would credit central bank with non-interest bearing bond equivalent to cash. Later on helicopter drop will be paid for, either through additional reserve requirements for banks or through profit made by government by issuing currency.
Quantitative easing vs. Helicopter money
In Quantitative easing, securities are bought in exchange of bank reserves thus lowering the government borrowing cost. Therefore this has indirect effect on real economy. People getting money from this policy have lower propensity to consume. Not much money goes in hand of people. In this commercial bank is the main recipient. Helicopter money on the other hand gives money directly in hand of citizens. This was given by Milton Friedman in 1969. According to this, if people will directly receive the money they will spend more freely thus creating inflation. In this public or fiscal authority is the recipient. These both working together would be beneficial for the economy.
Raghuram Rajan’s say
Raghuram Rajan, governor of RBI is of the opinion that helicopter money is a very risky experiment and it will not have much effect in creating money. It would be beneficial only if new notes created go directly in hands of poor. If it goes in hands of middle class or rich people they would save the money. People would have uncertainties arising in their minds subjecting to the scenario. This insecurity would compel them to save and again it will have no effect on real economy. For e.g. if in reality someone throws money from a helicopter, people will consider him to be lame and will raise questions in their mind as to why is he throwing money. In such a situation only few people will collect that money and go and spend it. Rest of the public will become surprised and will save the money because they would be uncertain about the future. On the other hand if this money goes in hands of poor people, they will spend it on essentials. Poor people live in misery and they would not think about saving it and would rather spend it on buying things required for their survival. But in reality money would not be thrown from a helicopter and would be distributed broadly and will be received by broad category. According to him, if the money is sent to treasury department it will be put to infrastructure and this would help in creating money. He fears that helicopter money would give a license to government to expand spending and they would continue with it even in normal conditions. This will result in excess money resulting in depreciation of currency.