Helicopter Money

Helicopter Money

The term ‘Helicopter Money’ was coined and introduced by American economist Friedman in the year 1969 in his popular essay, “ Optimum Quantity of Money”. But it was Ben Bernanke, former Federal Reserve chairman who popularized it in 2002 through his Quantitative Easing program. Milton Freidman used the term to signify “Unexpectedly dumping money onto a struggling economy with the intention to shake it out of a deep slump”. Through such kind of 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. This term ‘helicopter money’ could be described as a quantitative easing policy, where currency notes are increased and more money is pumped into the market. However, Helicopter Money is an unconventional monetary policy usually used to bring a sinking economy back on track.
It is usually employed in low-interest-rate environments when an economy’s growth remains weak. It is then executed by quickly increasing the money supply which can be enacted as monetary policy by a bank, or as fiscal policy by a government through massive tax cuts or spending programs, including relief programs like the stimulus checks paid to American households during the COVID19 pandemic.

Apart from implementing the concept of helicopter money, central banks can also use quantitative easing to increase the money supply and lower interest rates by purchasing government or other financial securities from the market through open market operations and thereby trying to spike the economic growth. Unlike with helicopter money that involves the distribution of printed money to the public, which will be directly available to the consumers to improve consumer spending, quantitative easing methods, does not have a direct impact on the public.

Inappropriate implementation of helicopter money is always followed by certain risks associated with it. The primary one among them is that the policy may lead to significant currency devaluation in the international forex markets, which further leads to the creation of more money. Unlike in the case of quantitative easing where the effects could be reversed by the sale of securities, the effects of helicopter money are permanent.

Zimbabwe is a country that enjoyed a double-digit growth rate and relatively better political stability in the post-recession period of 2009 to 2013. Unfortunately by the end of 2013 into 2014, the economy grew by a meager 2% and later it further deteriorated to 0.8% by 2016. With the annual inflation rate below 0% the period of 2014 to 2016 also characterized by very poor revenue performance on Zimbabwe Stock Exchange Blue Chip counters. Faced with a huge deflation rate the Reserve Bank of Zimbabwe prescribed through a massive project of issuing government paper to finance government programs in order to boost aggregate demand.
In an effort to stir the economy out of depression the Reserve Bank of Zimbabwe increased the broad money supply by 30% between 2015 to 2016. The economy responded by registering a massive jump in the GDP growth rate in the subsequent financial year from 0.8% in 2016 to 4.7% at the end of 2017. However, despite the temporary success story, the situation created a new problem for the economy, exchange rate volatility, and inflation headwinds.
In the helicopter preamble of Milton Friedman, he emphasizes the fact that the helicopter money event “…is a unique event which will never be repeated.” In contrast to this, the authorities kept on increasing the money supply growth against a flat GDP growth rate. The exponential growth in the money supply had further led the economy into a continued period of inflation and exchange rate volatility. It occurred due to the primary fact that the real sector of the economy is not growing in line with the rate of money being injected into the economy and thus created a situation of too much money chasing too few commodities. Thus Helicopter economics proved to be a disaster in the case of Zimbabwe.

Idea & Concept: Josin Jacob Research Analyst / Faculty
Content Development: Anju Kurian