Nobel prize-winning economist Milton Friedman first mentioned helicopter money, or helicopter drops, in the late 1960s, but the idea gained popularity in 2002, after former Federal Reserve Chairman Ben Bernanke referenced helicopter money as a tool to stave off deflation. The eurozone implemented aggressive quantitative easing (QE) and negative-interest-rate policies in an attempt to avoid deflationary periods. However, the European Central Bank's (ECB) policies proved ineffective and consequently, helicopter money could become a reality in Europe.
Helicopter Money Defined
Helicopter drops is a monetary policy that a central bank could implement to stimulate the economy. The policy is unorthodox and potentially an irreversible alternative to QE; it theoretically should be used in extreme economic environments, such as deflationary periods. Central banks could implement helicopter money by creating money, rather than issuing debt or raising taxes to fund government spending. Thereafter, central banks stimulate the economy by transferring money to the general public or spend the money on investments. As a result, the public would increase spending and, in turn, inflation should increase. Helicopter drops may be permanent and irreversible, contrary to QE, which is temporary.
European Economic and Monetary Policy
Europe started a QE program in March 2015 worth approximately 1.1 trillion euros. However, the ECB expanded its QE program by raising its monthly bond purchases to 80 billion euros per month, from 60 billion euros in March 2016. Moreover, corporate bonds became eligible for the QE program. The ECB's QE program is an indirect tool used to stimulate growth, but its effectiveness is lackluster. Despite the ECB's large stimulus program, Europe's harmonized index of consumer prices (HICP), a tool used to gauge inflation, remained near 0% since the start of the program, as of August 2016. Europe experienced deflationary periods during 2016, when it reported an overall HICP of -0.2% in February, -0.2% in April and -0.1% in May 2016.
To combat deflationary periods further, the ECB implemented a negative-interest-rate policy. In March 2016, the ECB set depository rates at -0.4%, which indicates that the central bank and private banks penalize depositors who keep money in banks. Negative interest rates should theoretically increase consumer spending and increase inflation because banks would lend to consumers and, thereafter, consumers would purchase goods and services. Banks, businesses and consumers should, theoretically, be investing and spending money in the negative interest rate environment, but the policy has proved to be ineffective.
Possibility of Helicopter Money
Although the ECB implements QE and negative interest rates, the eurozone is struggling to increase its inflation and gross domestic product (GDP) growth. The ECB expects inflation to be approximately 0.1% and GDP growth to be 1.4%. Consequently, economists are considering helicopter money as a last-resort monetary policy tool to stimulate the economy.
Former U.S. Fed Chairman Bernanke and former head of the United Kingdom's Financial Services Authority Adair Turner argued for the use of helicopter money in some economies. ECB President, Mario Draghi, stated that he is not ruling out helicopter money as a tool to stimulate the eurozone. Since the eurozone is experiencing deflationary periods, which adversely affects an economy over the long term, the ECB needs to find a way to increase inflation.
Deflationary periods cause consumers and businesses to curb spending because prices may continue to fall and therefore, they postpone purchases. Consequently, deflation causes economic weakness, which causes prices of goods and services to fall, and the cycle repeats until the ECB deploys other tools to reverse it. ECB's QE program and negative-interest-rate policy did not bring the eurozone's inflation rate close to its target of near 2%, and thus some economists and policy makers are considering helicopter money as an alternative.