![]() ![]() But using unrealistic examples is often a useful way at getting at the essence of an issue. What is helicopter money and how does it work?Īs I learned when I spoke about it in 2002, the imagery of “helicopter money” is off-putting to many people. Moreover, with central banks in Europe and Japan struggling to reach their inflation targets, money-financed fiscal actions may receive more attention outside this country.Įdited by Kemal Derviş and Jacques Mistral 2014 Nevertheless, it’s important that markets and the public appreciate that, should worst-case recession or deflation scenarios occur, governments do have tools to respond. economy has continued to strengthen and is not today suffering from the severe underutilization of resources and very low inflation (or even deflation) that would justify such an approach and, as I’ve noted, the Fed has other tools still available. To be clear, the probability of so-called helicopter money being used in the United States in the foreseeable future seems extremely low. I propose some tentative solutions for these problems. These include (1) the need to integrate the approach with standard monetary policy frameworks and (2) the challenge of achieving the necessary coordination between fiscal and monetary policymakers, without compromising central bank independence or long-run fiscal discipline. However, second, as a practical matter, the use of helicopter money would involve some difficult issues of implementation. In particular, it has the attractive feature that it should work even when more conventional monetary policies are ineffective and the initial level of government debt is high. First, in theory at least, helicopter money could prove a valuable tool. In this post, I consider the merits of helicopter money as a (presumably last-resort) strategy for policymakers. In this context, Milton Friedman’s idea of money-financed (as opposed to debt-financed) tax cuts-“helicopter money”-has received a flurry of attention, with influential advocates including Adair Turner, Willem Buiter, and Jordi Gali. However, in recent years, legislatures in advanced industrial economies have for the most part been reluctant to use fiscal tools, in many cases because of concerns that government debt is already too high. When monetary policy alone is inadequate to support economic recovery or to avoid too-low inflation, fiscal policy provides a potentially powerful alternative-especially when interest rates are “stuck” near zero. Consequently, at some point monetary policy faces diminishing returns. Moreover, the benefits of low rates may erode over time, while the costs are likely to increase. Still, so long as people have the option of holding currency, there are limits to how far the Fed or any central bank can depress interest rates. I argued that, even if the scope for conventional interest-rate cuts is limited by already-low rates, the Fed has additional policy tools available, ranging from forward guidance about future rate policies to additional quantitative easing to targeting longer-term rates. ![]() In previous posts, I discussed tools that the Fed might use in response to a future slowdown in the U.S. I replied, ‘Everybody knows Milton Friedman said it.’ As it turned out, many Wall Street bond traders had apparently not delved deeply into Milton’s oeuvre.” (Ben Bernanke, The Courage to Act, 2015, p. Dave Skidmore, the media relations officer…had advised me to delete the helicopter-drop metaphor…’It’s just not the sort of thing a central banker says,’ he told me. Milton Friedman had dubbed the approach a ‘helicopter drop’ of money. “The deflation speech saddled me with the nickname ‘Helicopter Ben.’ In a discussion of hypothetical possibilities for combating deflation I mentioned an extreme tactic-a broad-based tax cut combined with money creation by the central bank to finance the cut. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.” (Milton Friedman, “The Optimum Quantity of Money,” 1969) “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. ![]()
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