With no quick escape in sight for Covid-ravaged economies, authorities the world over are going back to the drawing board to find strategies to deal with this nightmare.
One such strategy doing the rounds is ‘helicopter money‘. It basically means non-repayable money transfer from the central bank to the government. It seeks to goad people into spending more and thereby boost the sagging economy.
Here we attempt to answer a few relevant questions about helicopter money.
- 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 increase the money supply and, via the government, distribute the new cash to the population with the aim of boosting demand and inflation.”
- Why is helicopter money in news now?
With the coronavirus-hit economy falling deeper and deeper into a chasm with each passing day, Telangana chief minister KC Rao today said helicopter money can help states comes out of this morass. He asked for the release of 5% funds from GDP by way of quantitative easing (QE).QE, a policy followed all over the world, is the only way to deal with the situation, Rao said. “To counter (economic crisis) this we need a strategic economic policy. RBI should implement quantitative easing policy. This is called Helicopter Money. This will facilitate the states and financial institutions to accrue funds. We can come out of the financial crisis. Release 5 percent of funds from the GDP through Quantitative Easing Policy,” he suggested.
- Is helicopter money the same as quantitative easing?
Quantitative easing also 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 monetise 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.
- Is Japan deploying helicopter money?
According to some analysts, the yield curve control that Japan is resorting to is basically a type of helicopter money only. That is because this strategy lets the government spend more without having to worry about bond yields jumping.BoJ, however, rejects the allegation on the basis that the “BoJ still buys bonds from the market and does not directly underwrite debt from the government, something that could undermine confidence among investors.”The line, however, is blurred as BoJ buys roughly the same or bigger amount of bonds issued by the government.