From UPSC perspective, the following things are important :
Prelims level : Helicopter Money, Quantative easing
Mains level : Not Much
With the coronavirus-hit economy falling deeper and deeper into a chasm with each passing day, Telangana chief minister KC Rao earlier this month has said helicopter money can help states come out of this crisis.
Various monetary policy tools are being considered to boost consumer demand in the economy which is stricken by the coronavirus pandemic. Helicopter Money is one such tool.
What is Helicopter Money?
- This is an unconventional monetary policy tool aimed at bringing a flagging economy back on track.
- It involves printing large sums of money and distributing it to the public. American economist Milton Friedman coined this term.
- It basically denotes a helicopter dropping money from the sky.
- Friedman used the term to signify “unexpectedly dumping money onto a struggling economy with the intention to shock it out of a deep slump.”
- Under such a policy, a central bank “directly increases the money supply and, via the government, distributes the new cash to the population with the aim of boosting demand and inflation.”
Is helicopter money the same as quantitative easing (QE)?
- Quantitative easing involves the use of printed money by central banks to buy government bonds.
- But not everyone views the money used in QE as helicopter money.
- It sure means printing money to monetize government deficits, but the govt has to pay back for the assets that the central bank buys.
- It’s not the same as bond-buying by central banks “in which bank-owned assets are swapped for new central bank reserves.
- Helicopter money is also different from a central bank directly financing the debt of a government.
Pros and cons of helicopter money
- Helicopter money does not rely on increased borrowing to fuel the economy, which means that it doesn’t create more debt and interest rates can remain unchanged.
- Generally, helicopter money boosts spending and economic growth more effectively than quantitative easing because it increases aggregate demand – the demand for goods and services – immediately.
- While government money drops that come from debt might not boost consumer spending, due to the debt needing to be repaid, it is often thought that ‘money finance’ will stimulate the economy.
- Unlike quantitative easing, using helicopter money as a tactic is not reversible, and many argue that it’s not a feasible solution to revive the economy.
- A country’s central bank sets its interest rates to reach economic growth targets.
- However, a helicopter drop means that a central bank cannot use interest rates to recover any costs, because the money is not linked to a borrowed asset (loan).
- Instead, the money is given directly to the public. This may lead to over-inflation and cause damage to the central bank’s financials.
- One of the main risks associated with helicopter money is that it could lead to a significant devaluation of the currency on the foreign exchange market.
- As more money is printed and supply increases, the value of the domestic currency could significantly decrease.
- It could also discourage speculators from buying the currency as it is less likely to perform well.