What is “Helicopter Money”?

Over the past decade, the U.S. has deployed Quantitative Easing (QE), an asset swap in which government bonds are exchanged for bank reserves, to help stimulate the economy. While that has proven effective in the recovery since the last recession, QE is not the only strategy available in the money policy tool chest.

In 1969, American economist Milton Friedman coined the phrase “helicopter drop” to describe another strategy that could work when interest rates are close to zero and the economy is weak or enters a recession. In his paper, “The Optimum Quantity of Money,” Friedman offered his theory in this manner:

“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.” 1

While the use of a helicopter is an outlandish means of deployment, Friedman’s hypothetical monetary policy would involve printing large sums of money and distributing it directly to the public financial account deposits. Rather than rely on banks to trickle down cash to qualified borrowers, the theory portends that a direct windfall of cash would encourage immediate consumer spending and thus be effective at stimulating the economy.2

One of the benefits of this strategy is that, as a one-off expansion of the amount of money in circulation, it would not require future tax increases. Other possible effects include:3

  • potentially direct impact of the public works spending on GDP, jobs and income
  • A temporary increase in expected inflation due to an influx in the money supply
  • Assuming nominal interest rates are near zero, higher expected inflation could induce lower real interest rates and encourage higher capital spending

While the actual practice of dropping “helicopter money” may be unrealistic, there are several economists — including former Federal Reserve Chairman Ben Bernanke — who haven’t ruled it out as an effective tool. According to Bernanke, this unconventional money policy could influence the economy via a broader number of channels, making it extremely likely to be effective in certain situations.

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1 Ben S. Bernanke. Brookings Institution. April 11, 2016. "What tools does the Fed have left? Part 3: Helicopter money" Accessed July 6, 2016.
2Tomas Hirst. World Economic Forum. Aug. 13, 2015. "What is helicopter money?" Accessed July 6, 2016.
3Ben S. Bernanke. Brookings Institution. April 11, 2016. "What tools does the Fed have left? Part 3: Helicopter money" Accessed July 6, 2016.

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