WHAT IS HELICOPTER MONEY?
'Helicopter Money' is an unconventional monetary tool. It involves printing large sums of money by the central bank of a country i.e. RBI in case of India, on the demand of the central government and distributing to the public free of cost. Sometimes suggested it as an alternative to the quantitive easing when the economy is in a liquidity trap(when the interest rate is near zero and the economy is in a recession). The name 'Helicopter Money' first coined by the economist Milton Friedman in 1969. Friedman used the term to signify ''unexpectedly dumping money onto a struggling economy to shock it out of a deep slump.''
It is a direct money supply into an economy through the government. The basic aim of Helicopter Money is to increase the demand for money as well as inflation. In this monetary tool, the central government doesn't have any liability on this money supply,i.e. the government does not have to pay any interest or to issue bonds to the central bank against this supply of money.
Quantitive Easing Vs Helicopter Money
As monetary policies of the central bank, Quantitive Easing and Helicopter Money involves money creation by the central bank to expand the money supply. But there is a difference between both. Under Quantitive Easing central bank lends money to the central government in exchange for bonds or other financial assets but in Helicopter Money, the central bank lends money to the government without taking any interest or purchase bonds. The effect on the balance sheet of the central bank of Helicopter money is somehow different from the quantitive easing. In QE central bank gives money by purchasing bonds or any financial assets of the government but in Helicopter Money, the central bank gives away money without increasing the assets on their balance sheet.
Disadvantages of Helicopter Money
'Helicopter Money' is an unconventional monetary tool. It involves printing large sums of money by the central bank of a country i.e. RBI in case of India, on the demand of the central government and distributing to the public free of cost. Sometimes suggested it as an alternative to the quantitive easing when the economy is in a liquidity trap(when the interest rate is near zero and the economy is in a recession). The name 'Helicopter Money' first coined by the economist Milton Friedman in 1969. Friedman used the term to signify ''unexpectedly dumping money onto a struggling economy to shock it out of a deep slump.''
It is a direct money supply into an economy through the government. The basic aim of Helicopter Money is to increase the demand for money as well as inflation. In this monetary tool, the central government doesn't have any liability on this money supply,i.e. the government does not have to pay any interest or to issue bonds to the central bank against this supply of money.
Quantitive Easing Vs Helicopter Money
As monetary policies of the central bank, Quantitive Easing and Helicopter Money involves money creation by the central bank to expand the money supply. But there is a difference between both. Under Quantitive Easing central bank lends money to the central government in exchange for bonds or other financial assets but in Helicopter Money, the central bank lends money to the government without taking any interest or purchase bonds. The effect on the balance sheet of the central bank of Helicopter money is somehow different from the quantitive easing. In QE central bank gives money by purchasing bonds or any financial assets of the government but in Helicopter Money, the central bank gives away money without increasing the assets on their balance sheet.
Disadvantages of Helicopter Money
- Helicopter Money is not feasible in the long run to revive the economy.
- It will create over inflation. The central banks can not use any interest rate to recover any cost. It is not linked with any borrowed asset.
- Another most important demerit of Helicopter Money is a devaluation of the currency. When the supply of money increases into the economy eventually the supply of the domestic currency also increases and as a result of its value in the international market will eventually fall.
Well explained
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