The Economic Survey 2017 mention the concept of helicopter money as a monetary stimulus policy (conceptualized in the developed world).
Helicopter Money is a tactics with the central bank for stimulating the economy.
Just as the name suggests, helicopter money describes a situation where a helicopter would fly over a community and drop money from the sky.
Helicopter money was coined by economist Milton Friedman back in the 60s as an extreme way to fix a country’s economy. He stated:
“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.”
His assumption is that the people would take this one-time monetary gift and spend it, thus jump starting the economy.
Advantages of Helicopter Money
- It should have a much greater impact on boosting spending and aggregate demand than quantitative easing. Evidence from Quantitative easing is that banks have tended to sit on the extra money and not lent it out. Quantitative easing has been relatively ineffective in a balance sheet recession.
- Can target higher inflation, which helps to avoid problems related to deflation and debt deflation.
- Better distribution. A criticism of quantitative easing is that it has benefited banks more than anyone else, and given the role of banks in the financial crisis, this is considered unfair. The recession and fiscal austerity has hurt lower income groups, the helicopter drop would help income redistribution.
Problems of Helicopter Money
- Inflation could increase more than expected.
- Central Bank could loose ‘inflation credibility’